Ratings since the Asian Crisis

Asia, Financial crisis

Managing Temporary Capital Inflows: Lessons from Asia and Latin America

As witnessed by Mexico and Argentina in 1995 and by the Southern Cone countries of Latin America in the early 1980s, the macroeconomic adjustment to a sudden reversal of foreign capital flows can be extremely painful. There are at least four major reasons why governments and central banks should care about the sustainability of the capital flows

How to spend it: Commodity and non-commodity sovereign wealth funds

Sovereign wealth funds have become important players in global financial markets. But their investments have repeatedly raised concerns, such as fear of industrial espionage or geopolitical threats. This paper argues that the principal motivation for setting up SWFs should put such concerns into the appropriate perspective. Development economics can explain both the funding sources and the motives that have led to the recent SWF boom, thus helping to prevent the imposition of investment restrictions in OECD countries. The basic principles of public finance and development economics leave little room for conspiracy theories, but draw attention to the fact that funding sources and economic motives differ between commodity and non-commodity SWFs. These principles point to several major motives for countries to build up sovereign wealth funds, rather than merely accumulating official foreign exchange reserves. Foreign exchange reserves can become excessively large, additional economic diversification and efficiency gains can be achieved, technology transfer and network benefits can be fostered, and demographic pressures can be tackled. When using the excess funds, governments have to take important, fundamental decisions. The Hotelling and Hartwick Rules provide theoretical guidance, demonstrating the benefits of transforming oil or other resources into other forms of wealth, rather than consuming them. This not only benefits the investing but also the recipient countries: Protectionism, such as restrictions imposed on SWFs from oil-rich countries, will tend to reduce the risk-adjusted return for oil exporters, and may well contribute to higher oil prices as oil supply is withheld. --

Debt overhang, liquidity constraints and adjustment incentives

Investment in most heavily indebted countries has been weak since 1982. Several papers (Krugman, 1988; Corden, 1988; Sachs, 1989) have subsequently established the debt overhang proposition: the existence of a heavy debt burden reduces the incentive to invest.1 This proposition has given an important rationale for the 1989 shift in international debt management, emphasizing debt relief rather than new money for problem debtors. This paper will raise doubts against the debt overhang proposition: Its analytical implications are found to be ambiguous, its empirical content is found to be weak. We conclude, that investment in the average debtor country is likely to benefit more from new lending than from debt reduction.

Innovative Approaches to Funding the Millennium Development Goals

There are now a wide array of proposals for new forms of financing the Millennium Development Goals, of which this Policy Brief discusses the ninearguably most "popular". Such proposals can be sorted according to their funding source. Firstly, a number of global taxes have been suggested, such as currency transaction taxes, environmental taxes, a brain drain tax, an international airport tax, taxation of ocean fishing, taxation of arms exports, a "bit" tax on computer use, or a luxury goods tax. Another broad group of funding proposals involvesthe private sector, either public-private alliances or exclusively individuals,corporate entities and the civil society. Here the focus is on topic-specific global funds, a shift of charitable giving towards the Millennium Development Goals orGlobal Premium Bonds and lotteries to stimulate private funding. Thirdly, thereare proposals that can be categorised under financial engineering (if not money creation), such as a development-focused allocation of Special Drawing Rights at the IMF, the International Finance Facility, and the use of public guarantees to stimulate private funding

OECD Development Centre Policy Brief No. 24: Innovative Approaches to Funding the Millennium Development Goals

Despite post-Monterrey donor initiatives, the Millennium Development Goals (MDGs) are underfinanced. * The revenue potential, the additionality and the speed of availability of new finance sources, and their political feasibility, are of particular importance. * On these criteria, it is unlikely that global taxes will be introduced in time. * The International Finance Facility, strengthened use of public guarantees and Global Premium Bonds, perhaps in combination, may stand a better chance of providing additional funds for the MDGs. * The most straightforward way to avoid underfunding of the Goals is to raise ODA further

Domestic Causes of Currency Crises: Policy Lessons for Crisis Avoidance

Summary Reisen stresses that domestic causes of currency crises can be endogenous to the international financial system. Net capital transfers imply current account deficits on the recipient side. Sustained capital inflows produce a real appreciation which diverts investment away from export?oriented sectors. There were common structural weaknesses. Fixed exchange rates understated the investment risk. Liberalised, under?regulated financial sectors made misdirected international investment possible. The ratio of foreign denominated liabilities to reserves is the best vulnerability indicator, yet the crisis was unanticipated: information was deficient but not all available information had been used. For capital inflows to be sustainable they must be stable and must be invested efficiently in tradeable sectors. These conditions were not met in Southeast Asia

Public debt, North and South

The recent rise in domestic public nonmonetary debt and in domestic bond yields is imposing a heavier burden on governments in countries like Brazil and Mexico than foreign debt does. This is a relatively new experience for developing countries but not for OECD countries. Reisen's discussion of rising government indebtedness, therefore, includes the experiences of four developing (Brazil, Mexico, Korea, and Indonesia) and three highly indebted OECD countries (Belgium, Ireland, and Italy). The major determinants for government debt rising are: 1) external transfers, which imply an internal transfer of resources from the private to the public sector, 2) fiscal rigidities, because of failure to broaden tax bases and cut government consumption, 3) high interest rates coupled with low growth of GDP, and 4) massive devaluation of the real exchange rate and big swings in value among key currencies.Economic Theory&Research,Public Sector Economics&Finance,Banks&Banking Reform,Strategic Debt Management,Environmental Economics&Policies