Asia's "resistance to financial globalization"
lessened impact of global financial crisis
Thailand's short-lived capital controls
after the 2006 coup were, for a long time, the ugly duckling of
global finance. Capital controls were put in place to prevent sudden destabilizing surges of investment funds into Thailand.
It was feared that, like a sort of financial tsunami, massive amounts of foreign money might flow into Thailand for a short time driving the baht up in value (currency appreciation) thus destroying export businesses when Thai exports became more expensive than other countries (non-competitive exports).
The foreign funds would finally leave the country again, after they had wrought their destruction, without providing the country with any real long-term benefit. Capital controls were meant to encourage long-term investment in the country rather than short-term cross-border arbitrage where traders try to profit from temporary differences and imbalances between countries.
Some experts warned ominously
that imposing capital controls would instead drive away all investment,
both the short-term profit seeking type and the desirable long-term
type as well. (On right two scenes from the famous ugly duckling fairy tale of Hans Christian Andersen made into films in 1931 and 1939)
Vocabulary:
capital controls - restrictions on investment money (capital flows) going into and coming out of the country, to prevent sudden inflows and outflows and encourage long-term investment, a Tobin tax is one way to encourage long-term investment
a Tobin tax - a Tobin tax is a small tax (0.1% to 0.25%) on all trade of currency across borders (See Wikipedia)
the ugly duckling - the rejected one....but not forever, from the famous fairy tale by Hans Christian Andersen, a baby duck is rejected by other ducks because he is ugly, when he grows up the duck is the most beautiful bird of them all, represents outsiders searching for their proper place in society (See Wikipedia)
a surge - a sudden large increase (in something that has been steady and stable, only increasing slowly)
stable - not changing suddenly or a lot, therefore predictable and easy to work with
a destabilizing surge - a sudden change (making the system unpredictable and difficult to work with)
appreciation, currency appreciation - when the currency of a country rises in value, making its exports more expensive and imports cheaper
export competitiveness, the competitiveness of Thai exports - the attractiveness of Thai exports to foreign buyers compared to similar exports from other countries (export competitiveness is determined by factors such as weak exchange rate, quality of goods, and how well-established and know the brand name is)
arbitrage - buying in one market and sellinn in another to make a profit (by exploiting differences in markets)
cross-border arbitrage - buying in one country and selling in another to make a profit (usually very short-term investment potentially causing large destabilizing capital flows in and out of a country)
ominously - worries you, makes you feel that something unpleasant is about to happen
capital controls - restrictions on investment money (capital flows) going into and coming out of the country, to prevent sudden inflows and outflows and encourage long-term investment, a Tobin tax is one way to encourage long-term investment
a Tobin tax - a Tobin tax is a small tax (0.1% to 0.25%) on all trade of currency across borders (See Wikipedia)
the ugly duckling - the rejected one....but not forever, from the famous fairy tale by Hans Christian Andersen, a baby duck is rejected by other ducks because he is ugly, when he grows up the duck is the most beautiful bird of them all, represents outsiders searching for their proper place in society (See Wikipedia)
a surge - a sudden large increase (in something that has been steady and stable, only increasing slowly)
stable - not changing suddenly or a lot, therefore predictable and easy to work with
a destabilizing surge - a sudden change (making the system unpredictable and difficult to work with)
appreciation, currency appreciation - when the currency of a country rises in value, making its exports more expensive and imports cheaper
export competitiveness, the competitiveness of Thai exports - the attractiveness of Thai exports to foreign buyers compared to similar exports from other countries (export competitiveness is determined by factors such as weak exchange rate, quality of goods, and how well-established and know the brand name is)
arbitrage - buying in one market and sellinn in another to make a profit (by exploiting differences in markets)
cross-border arbitrage - buying in one country and selling in another to make a profit (usually very short-term investment potentially causing large destabilizing capital flows in and out of a country)
ominously - worries you, makes you feel that something unpleasant is about to happen
Don't gorge yourself at the global financial globalization buffet, please
Friday evening, going out with friends to a pork barbecue restaurant [Thai: Mu Ka Ta] with all-you-can-eat meat plus lots of beer could, if you're not careful, make you sick the next morning.Same with all-you-can-eat financial globalization. You wake up the next morning and there is a global financial crisis. Credit and loans have dried up and you're suddenly left on your own wondering why you weren't more independent to start with. Doing things in moderation or taking the middle path [Pali: majjhimā paṭipadā] is a good way insure against over-indulgence.
Thailand's Capital controls look a lot better now than they did one year ago. Capital controls were a form of "resistance against financial globalization" and it turns out that the Asian economies which have resisted financial globalization the most have also been the economies least affected by the global financial crisis (Explained below).
Thailand's financial sector is certainly not closed to the world by any means but the cautious approach that Thailand adopted after the 1997 Asian Financial Crisis has paid off. A combination of long-term inflation targeting, central bank independence, foreign currency reserve accumulation, reliance on traditional bank deposits as funding for bank loans and high levels of deposit insurance protecting these deposits have all made Thailand's banking system stronger and more self-reliant (Read previous article for more reasons).
Vocabulary:
gorge yourself - eat too much
over-indulge - do something that you enjoy too much (until it has a negative effect)
independent - separate, not connected, working by yourself with your own resources
in moderation - acting in a way that is reasonable and not extreme
the middle path [Pali: majjhimā paṭipadā] - the Buddhist practice of non-extremism, the Buddha's Nirvana-bound path of moderation away from the extremes of sensual indulgence and self-mortification and toward the practice of wisdom, morality and mental cultivation (See Wikipedia)
financial globalization, international financial integration- the integration of financial markets of all countries of the world into one
integration - making all the parts of a system closely linked with other parts in the system (See glossary)
not X by any means - definitely not X (provides special emphasis)
inflation-targeting policies or framework - "an economic policy in which a central bank estimates and makes public a projected, or "target," inflation rate and then attempts to steer actual inflation towards the target through the use of interest rate changes and other monetary tools.(See Wikipedia on inflation targetting)
central bank independence - when the central bank is protected politically from interference by special interest groups
foreign currency reserves - foreign currencies held by a country (See Wikipedia)
deposit insurance - when the government provides insurance for money people keep in bank accounts, this increases confidence of the public in banks and prevents bank runs during time of financial crisis (See powerpoint presentation)
self-reliant - able to make your own decisions by yourself without needing other people to help you
gorge yourself - eat too much
over-indulge - do something that you enjoy too much (until it has a negative effect)
independent - separate, not connected, working by yourself with your own resources
in moderation - acting in a way that is reasonable and not extreme
the middle path [Pali: majjhimā paṭipadā] - the Buddhist practice of non-extremism, the Buddha's Nirvana-bound path of moderation away from the extremes of sensual indulgence and self-mortification and toward the practice of wisdom, morality and mental cultivation (See Wikipedia)
financial globalization, international financial integration- the integration of financial markets of all countries of the world into one
integration - making all the parts of a system closely linked with other parts in the system (See glossary)
not X by any means - definitely not X (provides special emphasis)
inflation-targeting policies or framework - "an economic policy in which a central bank estimates and makes public a projected, or "target," inflation rate and then attempts to steer actual inflation towards the target through the use of interest rate changes and other monetary tools.(See Wikipedia on inflation targetting)
central bank independence - when the central bank is protected politically from interference by special interest groups
foreign currency reserves - foreign currencies held by a country (See Wikipedia)
deposit insurance - when the government provides insurance for money people keep in bank accounts, this increases confidence of the public in banks and prevents bank runs during time of financial crisis (See powerpoint presentation)
self-reliant - able to make your own decisions by yourself without needing other people to help you
Symposium at Thailand's central bank last week
The Bank of Thailand held its annual international symposium last week (See announcement).The theme this year was "Financial Globalization and Emerging Market Economies." The keynote speaker was development economist and blogger Dani Rodrik of Harvard's John F. Kennedy School of Government. The topic of his keynote address was "The Disappointments of Financial Globalisation." Dani Rodrik's blog posting for November 7th covers the symposium and is titled "Can you resist financial globalization?" (Read posting) The blog posting discusses briefly the papers presented at the symposium (See webpage with papers at BOT).
Since this was an important conference this blog will look at all the papers in greater detail in the coming days but for now let's take a close look at Dani Rodrik's blog posting for today. Here it is in full:
Can you resist financial globalization?
November 07, 2008Yes you can, and Asia has been doing it. I am in Bangkok for a Bank of Thailand conference, and among other interesting contributions (by Jose Antonio Ocampo, Raghu Rajan, and Arvind Subramanian) is a nice paper by the BIS's Robert McCauley and Guonan Ma called "Resisting financial globalization in Asia." The paper documents how fours countries (China, India, South Korea, and Thailand) have thrown "sand in the wheels of finance" to varying extents. Interestingly, those countries that have done the most resisting are the ones that are the least affected by the crisis.
The paper makes the following points in particular:
* Asian-style resistance
to financial globalization has taken the form of limiting the role of foreign
banks in the domestic banking system and of restricting cross-border arbitrage
in foreign currency, money, bond and equity markets.
* Evidence from prices and quantities shows the most limited globalization in China, followed at a distance by India, followed in turn by Thailand and then Korea.
* The extent to which countries have been hit by the recent crisis follows this ranking (in reverse order) almost exactly. In particular, Korea has been the country hardest hit despite many other preventive policies (including large reserve build-up) before the onset of the turmoil.
* Evidence from prices and quantities shows the most limited globalization in China, followed at a distance by India, followed in turn by Thailand and then Korea.
* The extent to which countries have been hit by the recent crisis follows this ranking (in reverse order) almost exactly. In particular, Korea has been the country hardest hit despite many other preventive policies (including large reserve build-up) before the onset of the turmoil.
The following chart, taken from Chinn and Ito's work, and using an entirely different data source (IMF indexes on capital account policies), shows the same broad trend for East and Southeast Asian countries [chart shows changes in "openness"]:
Following the Asian financial crisis these countries experienced a reversal from their exceedingly high levels of international financial integration. As a result, they are now less globalized financially than Latin America by a wide margin.
And if you think all of this is just academic stuff which does not capture what is really going on on the ground, I would recommend a short conversation with the governor of Taiwan's central bank. You would quickly shed any doubts you may have harbored on the ability of determined policy to manage their capital accounts.
Vocabulary:
a symposium - a conference or large meeting in which experts or academics discuss a topic
papers presented at the symposium - research papers presented to the audience and discussed at a symposium
a conference - a large meeting on a speical subject that lasts a few days and brings together people with a common interest
a keynote - the main idea of a meeting, policy, or speech
a keynote speaker - the person who presents the speech that begins a conference that presents the essential idea for the conference
a keynote address - the speech made at the start of a conference by the keynote speaker
a blog posting - a short article published to a web page by blog software (for example: this whole website)
emerging market economies - between a devloping and a fully developed economy with: i. high growth potential, and markets sufficiently ii. large and iii. liquid and iv. receptive to foreign investment (See Wikipedia)
BIS, Bank for International Settlements - an international organization of central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks" (See Wikipedia)
thrown sand in the wheels of finance - meaning: if your throw sand in a machine the machine will stop working
the role of - the position and function of
ranking of X - position in a group, how good X is compared to other members of the group
reserves, foreign currency reserves - foreign currencies held by a country (See Wikipedia)
large reserve build-up - large amounts of foreign currencies held by a country (to protect it from sudden outflows of money from the country and the currency depreciation this would cause)
turmoil - disorder and conflict
onset of the turmoil - the beginning of the turmoil
a data source - economic statistics, numbers that can be used in an economic model to explain what is happening in the economy
just academic stuff - just things for professors at universities, not relevant to other people (such as business people and the general public)
on the ground - where the action is, where events are happening (not where they are being discussed such a university)
what is really going on on the ground - not just stuff that professors talk about
doubts - things that you think might not be true, uncertainties
harbour doubts - have doubts
shed any doubts you may have harbored - be certain of the truth
capital accounts - the part of the balance pf payments between a country and the outside world that records investment and capital flows into and out of the country
a symposium - a conference or large meeting in which experts or academics discuss a topic
papers presented at the symposium - research papers presented to the audience and discussed at a symposium
a conference - a large meeting on a speical subject that lasts a few days and brings together people with a common interest
a keynote - the main idea of a meeting, policy, or speech
a keynote speaker - the person who presents the speech that begins a conference that presents the essential idea for the conference
a keynote address - the speech made at the start of a conference by the keynote speaker
a blog posting - a short article published to a web page by blog software (for example: this whole website)
emerging market economies - between a devloping and a fully developed economy with: i. high growth potential, and markets sufficiently ii. large and iii. liquid and iv. receptive to foreign investment (See Wikipedia)
BIS, Bank for International Settlements - an international organization of central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks" (See Wikipedia)
thrown sand in the wheels of finance - meaning: if your throw sand in a machine the machine will stop working
the role of - the position and function of
ranking of X - position in a group, how good X is compared to other members of the group
reserves, foreign currency reserves - foreign currencies held by a country (See Wikipedia)
large reserve build-up - large amounts of foreign currencies held by a country (to protect it from sudden outflows of money from the country and the currency depreciation this would cause)
turmoil - disorder and conflict
onset of the turmoil - the beginning of the turmoil
a data source - economic statistics, numbers that can be used in an economic model to explain what is happening in the economy
just academic stuff - just things for professors at universities, not relevant to other people (such as business people and the general public)
on the ground - where the action is, where events are happening (not where they are being discussed such a university)
what is really going on on the ground - not just stuff that professors talk about
doubts - things that you think might not be true, uncertainties
harbour doubts - have doubts
shed any doubts you may have harbored - be certain of the truth
capital accounts - the part of the balance pf payments between a country and the outside world that records investment and capital flows into and out of the country
