Desai financial crisis, contagion, containment, from asia to argentina (2003)

'J FINANCIAL CRISIS, CONTAGION, AND CONTAINMENT FINANCIAL CRISIS, CONTAGION, AND CONTAINMENT FROM ASIA TO ARGENTINA Padma Desai PRINCETON UNIVERSITY PRESS PRINCETON AND OXFORD Copyright  2003 by Princeton University Press Published by Princeton University Press, 41 William Street, Princeton, New Jersey 08540 In the United Kingdom: Princeton University Press, Market Place, Woodstock, Oxfordshire OX20 1SY All Rights Reserved Library of Congress Cataloging-in-Publication Data Desai, Padma Financial crisis, contagion, and containment : from Asia to Argentina / Padma Desai p cm Includes bibliographical references and index ISBN 0-691-11392-0 (alk paper) Financial crises Economic stabilization I Title HB3722 D47 2003 332'.042—dc21 2002031745 British Library Cataloging-in-Publication Data is available This book has been composed in Sabon Printed on acid-free paper ∞ www.pupress.princeton.edu Printed in the United States of America 10 For TN a¯cha¯ryah pu¯rva-ru¯pam, anteva¯sy uttara-ru¯pam, vidya¯ samdhih (Taittirı¯ya Upanisad, 1.3.3) Contents Preface ix Introduction The U.S Economy in Transition 13 The Euro: Teething Troubles and Faltering Responses 46 Japan: The Lost Decade of the Nineties amidst Policy Paralysis 70 The Asian Financial Crisis 86 Blocks What Are Fundamentals? What Are Structural Issues? 99 The Current Account and the Exchange Rate 107 Financial Liberalization, Capital Account Decontrol, and the Regulatory Framework 110 The East Asian Crisis: A Crisis of Over-Investment or Unregulated, Premature Capital Flows? 117 The Asian Crisis Chronology 119 The Ruble Collapses in August 1998 136 Block The Ruble: Premature Capital Account Convertibility 156 Contagion from the Ruble to the Real 162 Beyond Bangkok: Crisis Erupts in Buenos Aires and in the Bosphorus 172 10 The Contagion 197 11 International Monetary Fund to the Rescue: How Did It Fare? Badly 212 viii CONTENTS Blocks Was There Moral Hazard in the Asian Financial Crisis? 242 How Much Corruption? Does Corruption Matter? 247 Chilean Capital Inflow Tax 253 Capital Account Convertibility in China and India: A Cautionary Tale of Two Countries 256 12 Crisis Prevention and Containment: The Next Steps in Financial Reform 263 References 285 Index 293 Preface THE BORROWING BINGE of the eighties and the nineties was a pervasive phenomenon in the global economy Japanese businesses borrowed heavily and invested unwisely in the eighties U.S households went overboard in stretching their finances in the second half of the nineties Businesses, banks, and several governments in emerging market economies accumulated unsustainable foreign debt obligations There was however a difference in the process in the developed group at the center and the vulnerable economies at the periphery of the international financial system Borrowers in the developed market economies managed their debt burden, by source and duration, of their free will Their policy makers undertook homegrown measures for battling the consequences of the resulting economic booms By contrast, the emerging market economies analyzed in this book invited financial and currency crises in their economies from destabilizing foreign capital flows These flows resulted from a premature opening of their financial systems in an environment of hothouse pressure that emanated from private and institutional lenders in the U.S.-led developed center From Asia in 1997 to Argentina in 2002, these countries struggled with the consequences of externally imposed financial crises and International Monetary Fund (IMF)led policy prescriptions that they did not own I adopt this comparative center-periphery framework in the book for tracing the origins and spread of financial crises I also employ it for arguing that emerging market economies with weak institutions and political maneuverability cannot be expected to grow crisis-free in a world of unrestricted capital mobility and floating exchange rates which are the latest magic bullets uncovered by the IMF Even the U.S., eurozone, and Japan, advanced market systems with institutional capabilities and open economy adaptability face problems, which I analyze, in implementing successful policies in pursuit of stable growth The book also provides simple analytical models grounded in step-bystep empirical evidence in the crisis-swept countries for isolating the impact of volatile short-term capital flows in initiating financial crises and spreading them across countries My policy judgments flow from relevant facts and unfolding events rather than from esoteric conceptualizing or random stone throwing I also keep away from an all-embracing treatment of globalization issues and focus on financial crises with an eye on the IMF, its dubious record in rescuing crisis-ridden economies, and its Index Note: Page numbers followed by the notations f, t, or n indicate figures, tables, or notes on those pages acquisitions, U.S.-eurozone, 58f, 58–59 Agency for the Reconstruction of Commercial Organizations (ARCO), 104, 152 agglomeration advantages, 69n agribusiness, 27 alternative minimum tax, corporate, repealed, 42 Apple Computer, 28 Argentina: bonds of, 209–10; Brazil affected by, 170–71; and contagion to Latin America, 209–10; crisis in, characterized, 9; currency board adoption of, 265; currency instability of, 4; and debt burden, 232–33; and debt default, 197, 209–10; and debt repayment compared to Turkey, 190–92; and debt restructuring, 7, 184, 231–33, 240; and financial origins of crisis, 172–73; and financial sector, 209; and fixed exchange rate, 109; and foreign debt, 1, 111; fundamentals of, 175–82; and IMF, 10, 183, 185, 186, 230–34; and IMF bailouts, 172–73, 196; as IMF challenge, 213; and IMF lessons from Asian crisis, 236; and political chaos, 5; social science assessments of, 174–75; structural issues of, 182–83; and temporary debt suspension, 274; and trade, 209; U.S role in, 279 arms trade, in Russia, 158–59 Arthur Anderson, 116 ASEAN + collective, 131, 135n Asian Development Bank, bailout, 214 Asian financial crisis, 86–98; and capital account controls lifted, 110–16; causes of, 117–18; causes of, per IMF, 215, 216– 17; chronology of, 119–34, 134n-35n; common features of, 128; conceptual and methodological issues of, 86; contagion of, 198, 200; and country classification, 87, 90; and currency appreciation, 108–9; described, 3; economic and financial record before, 94–95; fundamentals of, 90–91, 159–60; global effects of, 2; and IMF bailout, 215–16; as IMF challenge, 212, 213–14, 216–21; IMF diagnosis of, 214–15; and Indonesia, 124–25, 127–28; and Japan in IMF bailout, 84– 85; and Japan’s slump, 82; lessons of, for Argentina, 236; and Malaysia, 119, 122–23; map of, 88f; moral hazard of, 242–46; and mutual funds, 203; origins of, 120–21; and post-crisis era, 130–34; recovery from, 129; and recovery scenarios, 131–34; and short-term foreign debt, 92, 93t, 94–97; and South Korea, 124, 125–26; spread of, 203; and stock market recovery in Asia, 245; structural problems of, 99; trade and contagion of, 201–2 Association of Southeast Asian Nations, 131 Astra group, 250 austerity measures, and Asian financial crisis, 101 Austria, taxes, 54, 55f Bangkok Bank of Commerce, 251–52 Bangkok International Banking Facility (BIBF), 112 Bank Duta, 250 Bank Indonesia, 113, 114, 128 banking: Japanese bubble, 70–71; Japanese reform, 71 banking sector, Asian financial crisis in, 214–15; contagion of, 198; and Indonesia, 113, 114; and Japan, 76, 78–80, 79f, 80–82, 84; and Malaysia, 113, 114; and South Korea, 113, 115; structural problems of, 99; structural reforms of, 130; and Thailand, 112–13; and Turkey, 192–93, 194–96 See also names of individual banks Bank of Japan, 76–77, 81; and unsterilized intervention, 85n Bank Negara Malaysia, 114 bankruptcy provisions, 274, 275, 280–81 294 Bank Summa, 250 Bank of Thailand, 112, 113, 121, 217, 252 Basel Committee on Banking Supervision standards, 273 BIBF See Bangkok International Banking Facility BI (Business International) Index, 248t bilateral currency swaps, 135n bond contracts, collective action clauses in, 274–76 bonds: in Argentina, 209; euro-denominated, 58–59 Brazil: adjustable peg, 281n-82n; and budgetary management, 169; and contagion from Argentina, 209; crisis in, described, 4; debt burden of, 111; exchange rate of, 164, 207; foreign debt of, 1; fundamentals of, 227, 230; as IMF challenge, 213; and IMF policy stance, 227–30; recovery of, 4; structural reforms of, 228–30; trade and contagion of, 201 bribes, defining corruption, 247 Britain, policy trinity, 13 budget deficits: in Argentina, 177, 178f; in Brazil, 164, 167, 168f; and employee payrolls (Brazil), 167, 168f; and eurozone requirements, 48, 50f; and Japan, 73, 74f; and recession, 219; and Russia, 138, 140, 142f, 222; and Turkey, 187, 188f budget surplus: in crisis-prone economies, 90; in presidential campaign (2000), 18; U.S., 18 Buffet, Warren, 38 business-to-consumer (B2C) Internet sites, eurozone, 57–58 capital account controls: in China, 243; controversy of, 263; Fund member elimination of, 270; goal of, 111; and IMF, 6, 238–39; on IMF bailouts, 269–71; IMF perspective on, 238–39, 268–71; in India, 243; in Malaysia, 10; in Russia, 223, 238–39; selective retention of, per IMF, 282n; selective use of, advocated, 280 capital account controls removed: in Indonesia, 113–14; in Malaysia, 114; and mutual funds, 203; sequence of, 110–11; and short-term capital inflows, 95–97, 98n; in South Korea, 114–16; in Thailand, 111–13; in United States, 116 INDEX capital account convertibility, 110; in China, 256–59; growth without, 98n; in India, 259–62; and Russian ruble, 156– 61 capital account liberalization, beliefs about, 217–18; consequences of, for emerging economies, 237–38; premature, 217; refraining from, 240; and temporary market-oriented controls, 269, 270, 282n capital account transactions, Russian rules for, 157–58 capital accumulation, in East Asia, 117–18 capital flight, 69n; in Brazil, 169 capital flows, and Asian financial crisis, 134 capital inflows: composition of, 97n; liberalization of, capital investment: in Japan, 73f, 75–76; and labor productivity, 25; and U.S capacity expansion, 33f, 33 capital mobility, 96; costs of, 11–12; and fixed exchange rates, 267 capital transfers, temporary controls of, 268–69 Cardoso, Fernando Henrique, 162, 163 Carrefour, 26 cash flow growth, 23 casino element, 245 Cavallo, Domingo, 182, 183–84 Cavallo initiatives, 183–85, 190 center-periphery framework, 5–7; adoption of, in this work, ix; and comparative perspective, 7–8; and financial reform tensions, 219; and inequities, reasons for, 5–7 Central Bank of Brazil, 164 central bank discount rates: and crisis-immune economies, 205f; and crisis-prone economies, 204f Central Bank of Russia, 104, 109, 143, 146, 148, 152, 161; and IMF bailout funds, 225–26 central banks, as lenders of last resort, 236 chaebols, IMF rescue package, 125; and restructuring laws, 102–4; vulnerability of, 115 Chart Pattana, 252 Chernomyrdin, Viktor, 138, 148 Chilean capital inflow tax, 253–55 China, 89t, 91; and ASEAN + collective, 131; and capital account controls, 243; INDEX and capital account convertibility, 256– 59; dual currency system of, 256–57; exchange rate of, 206f, 207; investment vs borrowing in, 111; stock market of, 259 Clinton administration, deficit reduced by, cognitive dissonance, 245 collective action clauses, 274–76, 280–81 Compaq, 38–39 comparative perspective, 7–8; and centerperiphery framework, 7–8 conceptual conundrums, 12 Conference Board: indicators listed, 44n; predictions of, 44n-45n consumer confidence, post-9/11 turnaround of, 43 consumer spending, concerns about, 16 consumer subsidies, in Russia, 139–40 contagion: analytical issues of, 133; and Asian financial crisis, 198, 200; causes of, 200; characterized, 9–10; crisis transmission models of, 197; from Argentina and Turkey, 196; limited, 208–10; map of, 199f; minimized after Asian crisis, 129; post-9/11, 210–11; risks of, 198, 200; second-generation transmission model of, 202–4; and temporary controls on capital flows, 270; theories of, 200; transmission channels of, 201–204 corporate accounting scandals, 43 corporate cleanup, 37–39 corporate debt, borrowing costs of, 35; for small and medium firms, 35; trends of, 34f, 34–35 corporate earnings: decline in, 28; and productivity growth, 21–22; of S & P 500 companies, 27f, 27–28; and stock market prices, 22–24; upswing in, 27–28 corporate management, and eurozone changes, 56–58 corruption, 247–52; and bribes, 248; defining, 247; and economic growth, 249–50; and financial crisis, 250–52; in Indonesia, 250–51; measures of, 248f, 249; political, 248; ratings for selected countries, 248t; rent seeking or profit seeking, 249–50; in Russia, 137, 152–53; in Thailand, 251–52 Coryo Investment and Securities, 125 creative destruction, 5, 13 crisis-immune economies, 9, 90; before Asian financial crisis, 95; exchange rates 295 of, 206f, 207; fundamentals of, 89t, 91; interest-rate movements in, 204, 205f; stock market indexes in, 205, 207f crisis-prone economies, 9, 87, 90; exchange rates of, 206f, 207; fundamentals of, 89t, 90–91; interest-rate movements in, 204, 204f; short-term borrowing in, 93t, 94; short-term debt in, 92, 93t; stock market indexes in, 205, 206f crisis-safe economies, 9, 90; exchange rates of, 206f, 207f; fundamentals of, 89t, 91; stock market indexes in, 206, 207 crisis transmission, insights into, 197 cronyism: and economic growth, 249–50; in Indonesia, 250–51 currency appreciation, 108–9; and the ruble, 109 currency board adoption, 265 currency crisis, currency swaps, 135n current account balances: in Argentina, 177, 178f, 178–80; in Russia, 145; in Turkey, 188f, 189f, 189 current account convertibility, 110; and Chinese yuan, 257–58 current account deficits: before Asian financial crisis, 95; in Brazil, 162; in crisis-prone economies, 90; financing of, 107–8; and U.S concerns, 15, 16, 18, 19f, 20 current accounts: and factor incomes, 107; fundamentals of, 99; U.S components of, 107 Daewoo, 103, 104 Daimler-Chrysler, 26 debt, 51 debt, consumer, concerns, 16 debt, corporate, concerns, 16 debt burden: of Argentina, 232–33; of Brazil, 170, 228; of Russia, 140, 143f, 221– 22; of Turkey, 234–35 debt default, in Argentina, 186 “debt-growth” model, 230 debt moratorium and default, in Russia, 144, 145–46, 148 debt repayment: temporary suspension of, 274; Turkey and Argentina compared, 190–92 debt restructuring: in Argentina, 184, 231– 33; and IMF failures, 7; and IMF signals, 296 debt restructuring (cont.) 233; and poor performance under IMF initiative, 239–40; preemptive debt restructuring (cont.) initiative in, 237; private bondholder participation in, 263; proposals for, 11; in Russia, 239; in South Korea, 126; temporary suspension of, 274 debt service ratio, in Brazil, 230 debt swaps, in Argentina, 184, 230–31 debt-to-GDP ratio, eurozone, 48, 51f decision-making process, and borrowing differences, deflationary pressures, in Japan, 75 Denmark, euroization of, 62–63 Depression of 1929, and price-earnings ratios, 21 deregulation, U.S., 13 Dervis, Kemal, 193, 194 devaluation of ruble, 146–48 developed countries, 2; bouncing back, 7; as free agents, 1; listing, 98n; managing borrowing, ix; market arrangements of, developing countries See emerging market economies discount rates, 30; in Japan, 76f, 76 dollar: downward movement of, 20; euro vs., 20; U.S stance to euro, 59, 61; value of, determining, 13 dollarization: in Argentina, 184; and Argentina overvaluation, 177; Argentina’s peso-dollar-euro link, 185–86; and convertibility law in Argentina, 175; in Ecuador, 265; in Indonesia, 127; in Panama, 265; in Russia, 158 domino effect, 197 dot-com bust, 22 drug trade, and euro conversion, 50–51 dual currency system, 256–57 Duisenberg, Wim, 61–62 Duma: as centrist, 149; executive consensus in, 149; leftist stonewalling in, 137, 139–40; market reforms in, 151–52 Dutch disease, 151, 155n Dutch tulip mania, 45n East Asia: and adjustable pegs, 281n-82n; and capital accumulation, 117–18; and foreign debt, 1; Japanese bank lending, 84; Japanese FDI, 83, 84; Japanese investment, 83; Japanese trade-investment, INDEX 82–84; Japan as growth engine, 85; Japan’s malaise, 81–82; recovery, East Asian tigers, in Japan, 83–84 e-commerce, eurozone, 57–58 Economic Cycle Research Institute (ECRI): indicators of, 44n; predictions of, 44n45n economic growth, 52–53; and corruption, 249–50; and crisis-prone economies, 90; goal of stable, 2; and post-crisis Asian recovery, 130–31, 131f, 132f, 133f, 134f; in Russia, 151; in Turkey, 187f, 187; in U.S., 16, 17f economic miracles, diminishing returns of, 117 economic stabilization, in Russia, 140 economic targeting, 237–38 Ecuador, 265 Eichel, Hans, 272 emerging market economies: after Asian crisis, 128–29; and alternative policy trinities, 267; and Asian financial crisis, 198, 281; and borrowing binge effects, 1; and capital account liberalization, 237–38; categorizing of, 97; center-periphery framework of, ix; characteristics of, 14; commonalities of, 9; decision making of, 281; fixed exchange rates of, 265; floating exchange rates of, 266; IMF overhaul of, 102; performance of, 8; post-9/ 11 contagion of, 210–11; premature capital mobility of, 3–5; regulatory codes of, 272; use of label, empirical issues, 12 employment, U.S.-eurozone compared, 67, 68f energy system, in Russia, 155n Enron, 116 Estonia, 265 euro: adjustments to, minor, 48, 50; Argentina’s peso-dollar link to, 185; bond issues of, 58–59; enlargement of, 63; and EU membership, 63; exogenous factors of, 65; formal introduction of, 47; and labor productivity, 66; national currencies abolished, 47; post-9/11 turnaround of, 44; prospects of, 46; stabilizing of, 59–62; trans-Atlantic scenario, 65–69; transition to, 50–51; weakening of, 59 European Central Bank (ECB), 59–62; and euro adoption, 2; Federal Reserve com- INDEX pared to, 61; and monetary stimulus strict, 46; performance of, European Commission (EC): new entrant representation in, 64; and pension funds, 54 European Exchange Rate Mechanism (ERM) breakdown, 198 European Monetary Union (EMU): and features of eurozone, 46–48; formation of, 1, 2; investment trends of, 1; members of, 46–47, 47f European Union (EU): agglomeration benefits of, 69n; candidates for, 47f; and constitutional convention, 64; Council of Ministers, 63–64; enlargement of, 62, 63–64; and Estonia and Lithuania, 265; and former Soviet bloc, 62, 63; and map of Europe, 47f; Turkey’s entry into, 173, 195; and voting power distribution, 63– 64 eurozone: and budget deficit requirements, 48, 50f; and corporate culture, 56–58; and debt-to-GDP ratio, 48, 51f; disadvantages of, 46; inflation rate of, 48, 49f; labor in, 52; performance of, 8; policy trinity of, 13, 266; principal features of, 46–48; productivity of, compared to U.S., 65–67, 68f; prospects of, in 2002, 68–69; and public debt by country, 51f; recovery of, 3; and structural impediments, 14 excess capacity, of U.S., 34–36 exchange rate regimes: and adjustable pegs, 281n-82n; controversies of, 263; excluded arrangements of, 282n; fixed exchange rates of, 265; floating exchange rates of, 266; IMF rescue strategy for, 215–16; intermediate failure of, 264–65; proposals for, 11 exchange rates: and Argentina, 109, 184– 86; during Asian financial crisis, 124; and Asian panic, 121; in Brazil, 164, 207, 228; and capital mobility as priority, 96; in crisis-immune economies, 206f, 207; in crisis-prone economies, 206f, 207; in crisis-safe economies, 206f, 207; and currency appreciation, 108–9; in East Asia, 108; and euro, 59–62; and external shocks, 101; and IMF policy switch, 214; in Japan, 77–78, 81; and Malaysian controls, 123; and models of 297 currency crisis, 100; and ruble devaluation, 143–44, 146–48; in Russia, 109, 207; and Russian ruble, 156–61; in South Korea, 124; in Turkey, 191–92, 194–95; of yen, 81, 83f exchange rate systems, and ruble, 223 executive branch, in Russia, 138, 139 exports: in Brazil, 229; and currency appreciation hazards, 108–9; and Japanese yen lowered, 77–78 Federal Reserve, 3; concerns of, 15; debates of, 8; ECB compared to, 61; and economic slowdown, 20; effectiveness of, 30–32; and euro intervention, 59; independence of, 13; interest rate moves anticipated by, 27; interest rates of, 29f, 29; mission and approach of, 28–30; and policy trinity, 8, 266; post-9/11 turnaround of, 43; response of, to 9/11 events, 41 federal revenues, in Russia, 140, 142f, 142 Feldstein, Martin S., 218 Fimaco, 226 financial architecture, reforms in, 11–12, 263, 281 financial crises: center-periphery differences in, 7; and corruption, 250–52; exogenous-endogenous difference of, 6–7; and Meltzer Commission, 277; models of, 100; precursors of, 98n financial excess, causes and consequences of, 100–102 financial institutions, and U.S behavior, 13 financial sector: of Argentina, 209; of East Asia, 118; and EU reforms, 64; of South Korea, 125–26; and structural problems, 99; of Thailand, 112–13, 217, 251–52; of Turkey, 208–9; and U.S scandals, 116; WTO liberalization of, 97n-98n Financial Services Agency (Japan), 79 Financial Stability Forum: and hedge funds, 272; orthodoxy of, 263 Financial Supervisory Commission (South Korea), 102 first-generation contagion model, 197 first-generation currency crisis model, 144 “first generation” models, 100 fiscal stimulus, in Japan, 71 fixed exchange rates, and emerging market economies, 265 298 floating exchange rates, 2, 266; and Meltzer Commission, 277; supported by selective capital account controls, 280 FOMC (Federal Open Market Committee): policy reviews of, 30–31; post-9/11 turnaround of, 43 Ford, 26 foreign debt: of Argentina, 179ff, 179–80, 180f; of Asian economies, compared to Brazil, 168–69; of Brazil, 168–69, 230; of Turkey, 189f, 189–90 foreign direct investment (FDI): in Brazil, 169; in China, 258–59, 261; in India, 261; in Indonesia, 113–14; in Japan, 83, 84; in Malaysia, 123; in Russia, 137; in Thailand, 112 Foreign Exchange Management Act (FEMA), 260–61 Foreign Exchange Regulations Act (FERA), 259, 260 foreign exchange reserves: in Argentina, 180, 181f; in Turkey, 191f foreign investment: in Argentina, 183; in Russia, 151, 153–54 foreign trade, and contagion transmission, 201–204 France: labor in, 52, 53; pensions in, 54; taxes in, 54, 55f free capital mobility, Friedman, Milton, 42 fundamentals: of all Asian borrowers, 9; of Brazil, 165t, 166t, 227, 230; concept of, 99; and eurozone, 48, 49f, 50f, 51f; of India, 261; and models of currency crisis, 100; of Russia, 222; of Turkey, 187– 90, 234; of U.S., 16, 17ff, 18f Gateway Computers, 38–39 Gazprom, 104–5 GDP: in Argentina, 175, 176f; and eurozone pensions, 53; and eurozone taxes, 54, 55f, 56; and growth compared (U.S.eurozone), 67f; in Japan, 71, 72f, 73; post-crisis Asian, changes in, 130, 131f; post-crisis Asian, per capita, 130, 132f; taxes compared to, 56; in U.S., 17f General Motors, 26 Gerashchenko, Victor, 152, 161 Germany: euro in, 50–51; euro’s progress in, 60–61; labor in, 52; pensions in, 54; and Russia’s Soviet-era debt, 153; taxes in, 54, 55f, 56; unemployment in, 68 INDEX GKOs See government short-term bills Global Competitiveness Report (GCR) index, 248t global economy, alarming features of, globalization: approach to, ix; and Asian Crisis Five, 129; complexity of, 12; destructive potential of, x, Global-NetXchange, 26 government short-term bills (GKOs), 143, 145; and bank liabilities, 159; and debt default, 146 Great Depression, stock prices and earnings during, 23 Greece, 60 Green Party, 54 Greenspan, Alan: characterized, 28; Duisenberg compared to, 61; economic performance of, praised, 14–15; fiscal stimulus package of, 42; otoh-botoh approach and, 28; post-9/11 turnaround, 43; public pronouncements of, 61 G-7 leadership style, 281 Habibie, B J., 119, 128 Halla group, 125 Hanbo, 120 harmonization, 69n hedge funds, 200; destabilizing flows of, 272; difficulty of regulating, 282n; and exogenous crisis, 218 Hewlett-Packard, 39 high technology: and decline in stock prices, 28; and eurozone, 57; and labor productivity, 28–29; and stock market switch in 2000, 37; upswing of, 28 high technology recession, 22 Home Depot, 28 Hong Kong, 89t, 91; exchange rates of, 206f household debt: hangover from, 36f, 36– 37; personal saving vs disposable income, 34f, 36f; trends in, 34f, 35–37 households: and drop in wealth pre-9/11, 39; in Japan, 75 Hyundai, 103–4 IFIAC See International Financial Institution Advisory Commission IMF bailouts: bailout guarantees in borrowing countries, 245–46; bailout guarantees for foreign creditors, 244, 246; in Brazil, 162–63; and capital account con- INDEX trols, 269–71; characterized, 2, 6, 10– 11; and credibility damage, 238; EastAsian, 84–85; and flexible exchange rates, 282n; and IMF-led external pressures, 281; in Indonesia, 213; and intermediate exchange rates, 264, 282n; and Meltzer Commission, 276–78; policy ideology questioned, 238; prescriptions monotonous, 238; recommendations for, 237; requirements for, 237–38; in Russia, 225; size of, 235–36; in South Korea, 125, 237; and Suharto cronyism, 251; in Thailand, 213, 214; in Turkey, 173, 194, 195, 196, 234–35; and World Bank, 214 IMF Contingent Credit Line, 279 India: and capital account controls, 243; and capital account convertibility, 260– 62; and current account convertibility, 282n; and foreign exchange regulations, 259–60; and fundamentals, 261 Indonesia: banking sector of, 113, 114; capital account controls of, removed, 113– 14; corruption in, 250–51; cronyism in, 250–51; economic indicators in, 89t, 90; and IMF, 125, 220; IMF bailout of, 213; political uncertainty of, 127 industrial production, in Japan, 73, 74f inflation: in Argentina, 175, 176f, 177; in Brazil, 162, 163, 164; and Cavallo Plan, 190; in crisis-prone economies, 90; and euro stability, 60; in eurozone, 48, 49f; inertial, 108; and interest rates, 29–30; in Japan, 71, 72f, 73; pre-9/11, 33; and productivity, 29; in Russia, 140, 141f, 148, 151, 222–23; and Russian exchange rate, 147f, 147; in Turkey, 187, 188f, 234; in U.S., 16, 17f information technology: and capital investment, 25; and debt impact, 35; and eurozone, 53; and giant hardware suppliers, 35; and labor productivity, 24–27; and total factor productivity, 26 intangible wealth, 23–24 Intel, 28 Inter-American Development Bank (IDB), 228 interest rates: and crisis-era movements, 204, 204f, 205f, 211n; post-9/11 turnaround of, 43; pre-9/11 cuts, 39; and ruble appreciation, 149; increase of, in U.S., 29 299 International Financial Institution Advisory Commission (IFIAC), 276 International Monetary Fund (IMF): and Argentina, 183, 185, 186, 230–34; and Argentina bailout, 172–73; and Argentina debt settlement, 233–34; and Argentina options outlined, 231–32; and Asian crisis recovery scenarios, 132; and Asian financial crisis, 101, 119–20; and Asian financial crisis as unprecedented, 212; bailouts characterized by, 2, 6, 10–11; and Brazil, 169–71; and Brazil policy stance, 227–30; and Brazil rescue package, 5; and capital account controls, 238–39, 268–71; capital account role of, 98n; characteristics of response of, 212; and Chinese current account convertibility, 257; and Communist resistance, 224; fiscal policy of, as misguided, 219; fiscal targets of, revised, 220–21; historical shift in focus of, 282n-83n; and Indonesia, 125, 127–28, 135n; and inflexible policy posturing, 240; and macroeconomic targeting, 237–38; and Meltzer Commission overhaul, 276–78; operating as G-7-led institution, 7; policy record of, assessed, 7–8, 212; as possible lender of last resort, 236–37, 280; as quasi-lender, 280; and recession resulting, 4; record of, questioned, ix-x; reform of, called for, 263–64; rescue packages of, 10–11; and Russia, 138, 161; and Russian financial crisis, 147–48; Russian membership in, 222; and Russian policy agenda, 222; and Russia’s market reforms, 224–25; and solutions to crisis, 10; and South Korea, 125; and sovereignty issue, 218; unsatisfactory role of, 86; U.S role in, 278–79 Internet Tax Freedom Act of 1998, 57 Internet technology, purchasing, 26–27 intervention, unsterilized, 85n inventory control, 27 investment: and foreign holders in India, 261; and pre-9/11 monetary policy, 40–41 investment, domestic, in Japan, 71, 73f, 73 investment rates: in Argentina, 177–78, 178f; in Turkey, 189f, 189 Japan: ASEAN + collective, 131; and bad loans, 2; borrowing patterns of, 1; and loans to East Asia, 202–203; origins of 300 Japan (cont.) malaise in, 70–73; paralysis of, 14; policy trinity of, 13, 266; stagnation of, Japanese bank lending, in East Asia, 84 Japanese bubble, 78 junk-bond default rates, 35 keiretsu: capital misallocation, 70; reforms, 78, 79 Kia Motors of Korea, 120 Kiriyenko, Sergei, 136, 139, 148 Koizumi, Junichiro, 71, 73–74, 75; reforms of, 80–82 labor, and eurozone pensions, 53–54 labor costs, lowered 1993–2000, 35 labor markets, eurozone, 51–53 labor mobility, U.S vs eurozone, 52 labor productivity: and capital investment, 25; and high technology, 28–29; and information technology, 24–27; and unemployment, 29; U.S., 24–27 labor unions, eurozone, 53–54 Latin American debt crisis, 200–201 leveraged buyouts, 37–39 Liberal Democratic Party (LDP), 73, 81 liberalization, as orthodoxy, 263 Lithuania, 265 long-term bonds (OFZs), 143 Long-Term Capital Management, 14 Long-Term Credit Bank, 79 Lukoil, 104 Luxembourg, as tax haven, 54 Maastricht Treaty, 48; emergency support, 51–52; growth and stability pact, 62 mafia, 159 Malaysia, 10; banking sector in, 113, 114; capital account controls in, 114, 239, 270–71; corporate class of, 135n; economic indicators in, 89t, 90; exchange controls in, 123 maps, of East Asian economies, 88f market economy, U.S arrangements for, market reforms, in Russia, 151–53 media services, and debt levels, 35 Meltzer Commission, 218, 276–78; U.S Congress appointing, 275–76 merchant banks, 115 mergers and acquisitions, 38–39; in Russia, 153; U.S.-eurozone, 58f, 58–59 Mexican peso crisis, 198 INDEX Mexico, and tequila crisis indebtedness, 211n MICEX See Moscow Interbank Currency Exchange military dictatorship, in Brazil, 163 Miyazawa, Kiichi, 76 models of currency crisis: first generation, 100; second generation, 100 Mohamad, Mahathir, 119, 122, 244 monetary policy: doubts about efficacy of, 30–32; FOMC reviews of, 30; and free capital mobility, 267; of Japan, 71, 75– 78; principle and promise of, 31; and response to 9/11 events, 41–42; of Thailand, 268; of U.S., 28–29 monetary policy economy, money supply growth, in Russia, 140, 141f moral hazard, Asian financial crisis, 242– 46; Meltzer Commission, 277; penalties to reckless investors, 271; short-term debt, 242 Morgenson, Gretchen, 35, 42 Moscow Interbank Currency Exchange (MICEX), 156–57, 158, 160; and IMF bailout, 225–26 multilateral financial institutions, Russia and, 221–22 mutual funds, 203 Nairu See Nonaccelerating inflation rate of unemployment Nasdaq stock index, 79; pre-9/11 levels, 33 Netherlands, taxes in, 54, 55f, 56 new economy, and productivity growth, 25–26 NFPS (nonfinancial public sector, Brazil), 164, 167 Nice summit, 63, 64 Nikkei Stock Average, 79 Nippon Credit Bank, 79 Nonaccelerating inflation rate of unemployment (Nairu), 29 nonferrous metallurgy index, 149–50, 150f nonfinancial public sector (NFPS), 164, 167 Norilsk Nickel, 104 nuclear weapons, in Russia, 221 Nunn-Lugar warhead program, 278–79 oil, in Russia, 153 oil prices, in Russia, 144–45, 145f, 149, 151 oil shocks, 197; spillover, 200 open-door policies, 243–44 INDEX open economy, competitive pressures of, 27 Organisation for Economic Co-operation & Development (OECD), in South Korea, 115, 244 over-investment, in East Asia, 117–18 overnight interest rates, in Japan, 76f, 77 overnight loans, 30 301 Quaker Oats, 38 recession: and budget deficits, 219; concept of, 32; defining, 32; and eurozone, 67– 69; IMF resulting, 10; in Japan, 70, 80, 81, 85; NBER definition of, 32; pre-9/11 fears of, 31–32; pre-9/11 hard landing, 33; in Turkey, 195; in U.S., 39–42 recovery, reform fatigue, 129 regulation for speculative capital flows, 271–76 rescue packages, 10–11 Reserve Bank of India, 260 Resolution and Collection Corporation, 80 retirement benefits, eurozone, 53–54 risk management, 3; and Basel Committee standards, 273; and emerging markets, 253 Rogers, Elliot, 39 Rubin, Robert, 42 ruble, 109 rupee, 260 Russia: banking system in, leveraged, 267; big business in, 104; budgetary management in, 171n; capital account controls in, 6, 238–39; debt restructuring in, 239; economic performance of, 4; exchange rates in, 109, 207; financial services liberalization in, 98n; foreign debt and, 1, 111; foreign investment doubts of, 102, 105; funding considerations of, 236–37; and goals of West, 221–22; handicaps and bottlenecks of, 105; IMF bailout of, 145, 225; and IMF errors summarized, 222; and IMF structural cleanup, 101–2, 104–5; and intermediate exchange rates, 264, 282n; macroeconomic stabilization in, 222–24; target band in, 282n; trade and contagion in, 201; U.S role in, 278– 79; vulnerabilities of, Russian Federation, and regional polarization, 138–39 Russian financial crisis: described, 136; exogenous shocks of, 144–45; and IMF relationship, 212–13; and political turmoil after shock therapy, 138–40; recovery from, under Putin, 136; and shock therapy, 137 real estate, and Japanese bubble, 70 Real Plan: adoption of, 162; devaluation effects of, 170; pluses and minuses of, 163–64 Sammi Steel, 120 Samrasong Land, 120 Samsung Group, 103 S & P 500 stock index, pre-9/11 levels, 33 Panama, 265 pension benefits, eurozone, 53–54 pension system, in Russia, 140, 142 PepsiCo, 38 Pero´n, Juan, 174, 182 personal saving, disposable income vs., 36f, 36 Philippines, and Asian financial crisis, 3; economic indicators of, 89t, 90–91 political corruption, 248 political parties: in Brazil, 163, 167; in Thailand, 252 See also names of individual parties pork-barrel projects, in Japan, 73 Portugal, taxes in, 54, 55f postal savings system, 75 price-earnings (P/E) ratios: decline of, 28; reasons for upswing of, 21; stock market boom of, 20, 21, 22f price levels: in Japan, 75; in Russia, 149– 51, 150f, 222 private sector, and net deficit, 18 privatization: in Brazil, 163; in Japan, 75; in Russian boondoggles, 154n-55n; in Turkey, 195 production sharing agreement (PSA), in Russia, 140, 153 productivity: and euro intervention, 59–60; Federal Reserve model of, 8; in U.S., 5, 14 productivity growth: and corporate earnings, 21–22; labor cost vs., 37; U.S.-eurozone, 65–67, 68f public sector net balance, U.S., 18, 19f Putin, Vladimir, 136, 153–54; election of, 149 302 saving rates: in Argentina, 177–78, 178f; in Brazil, 230; in crisis-prone economies, 90; in Turkey, 187, 189f; U.S personal, 36 Sberbank, 104 Sears, 26 second-generation contagion models, 201 “second generation” models, 100 semiconductors: and contagion transmission, 202; and technology, 26 September 11 attacks: and Brazil, 229; and Brazil effects, 171; debates over economy after, 16; Japanese policy response after, 81; and post-9/11 contagion, 210– 11; and U.S economic impact, 41; U.S monetary policy response after, 41–42; U.S turnaround after, 43–44 shakeouts, corporate, 37–39 shareholder capitalism, 56; new arrangements of, 106 short-term capital flows, and hedge funds, 218; IMF controls lacking, 220–21; and intermediate exchange rates, 264, 282n; regulating speculative flows, 271–76; and speculative cycles, 271; standards to moderate, 271–76 short-term capital inflows: and Chilean capital inflow tax, 253–55; contagion effect of, 197; curbing mechanisms of, 253, 255 short-term debt: in Argentina, 231; Asia and Brazil compared, 169; in Brazil, 169; center-periphery, 6; consequences of, 3–5; and crisis-prone economies, 90; explaining deluge of, 95–97; IMF credits compared, 235–36; and IMF rescue packages, 10–11; moral hazard of, 242; and risk management, 3; in Russia, 143–44, 145–46; South East Asian, 92, 93t, 94– 97; in Turkey, 190f, 190, 191f, 193 short-term funds, IMF diagnosis of, 214 Silva, Luiz Ignacio “Lula” da, 171 Singapore, 89t, 91; short-term debt and, 92, 93t South Korea, and ASEAN + collective, 131; banking sector, 113, 115; capital account controls removed, 114–16, 244; currency peg abandoned, 124; debt restructuring precedent, 240; economic indicators, 89t, 90; foreign investment barriers, 105–6; IMF bailout, 213; IMF fiscal targets, 220; IMF rescue package, 125, 237; and Japanese bank exposure, INDEX 202–203; structural cleanup, 102–4; U.S role in, 278 Soviet Union (former), growth exhaustion of, 117 See also Russia Spain, liberalization of, 53 speculative flows, regulating, 271–76 spillovers, 200–201 Starbucks, 28 State Administration of Foreign Exchange (SAFE), 257, 258 stock market, in China, 259; corporate cleanup of, 37; and Japanese markets, 79–80 stock market boom, 20–22; bearish mode, 22; concerns, 15, 16; Fed monetary policy, 31; largest ever, 20; stock price index, 20, 21f stock market indexes, and Asian financial crisis, 130, 133f; in crisis-immune economies, 207f, 208; in crisis-prone economies, 206f, 208; in crisis-safe economies, 207f, 208 stock markets, in Argentina, 180, 181f, 182 structural issues, in Turkey, 192–94 structural problems: in banking sector, 99; concept of, 99; delaying restructuring, 105–6; in eurozone, 48–59; in financial sector, 99; in South Korea, 126 structural reforms: in Brazil, 228–30; IMF diagnosis, 215, 216–17; in Japan, 77– 78; mandate intrusive, 217–19; and post-crisis East Asian recovery, 130–34; resistance to, 106 subsidies, in Russia, 138, 139–40; Russian housing, 152 Suharto (President), 119–20, 127, 250–51 Summers, Lawrence, 107 Taiwan, 89t, 91; and short-term debt, 92, 93t Tanaka, Makiko, 81 tax cuts, Bush rebate effects, 45n; high income and corporate, 42; response to 9/ 11 events, 41–42 taxes, corporate, eurozone, 54, 55f tax evasion, in Argentina, 182–83; and euro conversion, 50 tax system: in Argentina, 183–84; and ecommerce sales, 57; in eurozone, 54, 55ff, 56; in Japan, 78; in Malaysia, 123; in Russia, 139; Tobin tax, 273 technology users, and productivity, 23–24 303 INDEX telecommunications, and debt levels, 35 tequila crisis, 211n, 244 Texas Instruments, 38 Thailand: banking sector of, 112–13; capital account controls removed from, 111– 13; corruption in, 251–52; crisis predictions, 217; current account deficit in, 15, 101, 107–8; economic indicators of, 89t, 90; financial sector of, 112–13; IMF bailout of, 213, 214; and IMF fiscal targets, 220; Japanese bank exposure, 202–203; monetary policy autonomy, 268 third-generation currency crisis model, 144 Tobin, James, 273 Tobin tax, 273 total factor productivity (TFP), in East Asia, 117–18; and information technology, 26 trade: and post-9/11 contagion, 210–11; in Turkey, 208–9 trade balance, in Russia, 144, 145f trade deficits, in Japan, 75 transparency, hedge funds, 272 Transparency International (TI) index, 248t triple-policy arrangements, 2; alternative, 267–68; described, 2; eurozone, 59; old impossible trinity, 266–67; post-9/11 turnaround of, 44; unsuitability of, 2; and U.S economy, 13 tulip mania, 45n Turkey, 173; banking sector of, 192–93, 194–96; budget deficits of, 5, 187, 188f; chronic problems of, 4–5; contagion limited in, 208–10; crawling band, 282n; crisis in, characterized, 9; current account balances in, 188f, 189f, 189; and debt repayment, compared to Argentina, 190– 92; exchange rates of, 191–92, 194–95; foreign debt of, 1, 189f, 189–90; foreign exchange reserves in, 191f; fundamentals of, 187–90, 234; growth rates of, 187f, 187; history of rescue programs in, 235; IMF bailouts in, 196, 234–35; as IMF challenge, 213; inflation in, 187, 188f; intermediate exchange rates in, 264, 282n; investment rules in, 111; political institutions in, 194; saving rates, 187, 189f; short-term debt of, 190f, 190, 191f, 193; structural issues of, 192–94; U.S role in, 279 two-party system, and free-enterprise politics, 13 Uchitelle, Louis, 25 unemployment: in Brazil, 164; in eurozone, 52–53; in Japan, 73; and labor productivity, 29; low, 30; non-farm in 2000, 33; post-9/11 impact of, 41; post-9/11 turnaround of, 43; U.S., 16, 18f; U.S.-eurozone compared, 67, 68f United Energy Systems (UES), 105, 152 United States: capital account controls removed in, 116; floating exchange rates of, 266; funding the IMF, 236, 278–79; post-9/11 turnaround in, 44; post-crisis Asian dependence on, 131 Uruguay, banks in, threat to, 173; and contagion factor, 209 U.S Congress: bankruptcy-style provisions of, 274, 275; Meltzer Commission, 275–76 U.S economy: characteristics of, 13; exceptional features of, 16; expansion of, in 1990s, 14–16; fundamentals of, 16, 17ff, 18f; resilience of system, 14 U.S Treasury, 278 value-added tax (VAT), 54, 55f Viravan, Amnuay, 121 volatility, in U.S stock market, 31 voluntary, standstill clauses, 274 Wall Street-Treasury complex, 97, 98n, 243 wealth effect, 29–30, 36; negative, 39; and stock market fluctuations, 44n welfare state, and labor market, 65 Wolf, Martin, 48, 85n, 96 World Bank, bailout, 214; in Brazil, 228; and Meltzer Commission, 277–78; and pilot project with IMF, 279 World Trade Organization (WTO), liberalizing financial services, 97n-98n Yeltsin, Boris: cabinet composition of, 139; Chernomyrdin sacked by, 148; resignation of, 149 yuan, 256–58 .. .FINANCIAL CRISIS, CONTAGION, AND CONTAINMENT FINANCIAL CRISIS, CONTAGION, AND CONTAINMENT FROM ASIA TO ARGENTINA Padma Desai PRINCETON UNIVERSITY PRESS PRINCETON AND OXFORD Copyright... Cataloging-in-Publication Data Desai, Padma Financial crisis, contagion, and containment : from Asia to Argentina / Padma Desai p cm Includes bibliographical references and index ISBN 0-691-11392-0 (alk paper) Financial. .. rates to stem capital outflows, sharp budget cutbacks and fiscal discipline to restore investor confidence, and a switch from fixed to floating exchange rates (An exception to this occurred in Argentina