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Capital Market Integration
•Foreign Direct Investment (FDI) means the ownership of
tangible assets in the home country by foreign firms or
individuals. Example: IBM’s Paris operations, Ford Motor
Facilities in the U.K. and Brazil, BMW’s plants in South
Carolina, or Nissan’s China operations.
•The term capital market integration means the liberalization
of restrictions on foreign ownership of financial assets
(including equities).
The U.S. Treasury and IMF
are “champions” of capital
market integration. Mexico,
Thailand, Brazil, Malaysia,
and the Philippines are
examples of nations that have
eased restrictions on inflows
of financial capital. China and
India have resisted integration.
Rogoff’s views1
Capital market integration is a good thing because:
•It allows financial capital to flow to areas where the rate of
return of tangible capital is highest.
•It enables emerging economies to diversify the domestic
output mix
•It accelerates the transfer of technology.
K. Rogoff.”International Institutions for Reducing Global Financial
Instability,” Journal of Economic Perspectives, Fall 1999:21-42
•President Zedillo’s decision to devalue the peso in Fall
1994 (apparently) precipitated a run on peso-denominated
assets.
•The peso lost nearly 40 percent of its value against the
dollar in the first 3 months of 1995.
•The Mexican government had substantial short-term debt
denominated in dollars (tesobonos).
•U.S. Treasury Secretary Rubin spearheaded an effort to
put together a bailout package.
8.5
Federal Reserve of New York
8.0
7.5
7.0
6.5
6.0
5.5
5.0
1/03/95
5/23/95
10/10/95
Pesos to the U.S. Dollar
2/27/96
The Asian Flu
•This is the term used to describe the crisis of 1997 and
1998 that involved S. Korea, Thailand, Malaysia, and
Indonesia.
•The currencies of theses nations came under speculative
attack, resulting in severe depreciation against the dollar,
yen, and other currencies.
•The crisis choked off sources of short-term and longterm financing, precipitating an avalanche of business
failures.
•Where debts were denominated in dollars or yen,
repayment schedules measured in the home currency
rose concomitantly.
60
Federal Reserve of New York
55
50
45
40
35
30
25
7/10
8/07
9/04
10/02
10/30
11/27
12/25
Thai baht per U.S. dollar
1/22
4.5
Federal Reserve of New York
4.0
3.5
3.0
2.5
97:07
97:09
97:11
98:01
98:03
98:05
98:07
98:09
Malaysian ringgits per dollar
98:11
2000
Federal Reserve of New York
1800
1600
1400
1200
1000
800
7/28/97
10/06/97
12/15/97
2/23/98
5/04/98
7/13/98
Korean won per dollar
9/21/98
11/30/98
The explanations proffered by economists and business writers
included:
•A banking sector “captured” by state enterprises or business
oligarchies.
•Overexposure of banks to commercial real estate.
•A lack of financial transparency and conformance with international
accounting standards.
•Cronyism, nepotism, and corruption.
•Mischief-making by the world community of foreign exchange
speculators.
•Rogoff claims that real business cycle theory can partly explain the
Asian slump of 1997-98.
Proposals for Reform
•“Deep pockets” international lender of last
resort.
•International financial crisis manager.
•International bankruptcy court.
•Global financial regulator.
•Global version of the FDIC.
•Movement to a single global currency.
•Controls on capital inflows.
•Controls on capital outflows.