Multinational Policymaking

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Multinational Policymaking

• The International Financial Architecture

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International Financial Architecture

• The international financial architecture is the
  institutions, governmental and non-government
  organizations, and the policies that govern
  activity in the international monetary and
  financial markets.
• Since the collapse of the Bretton Woods system
  that most important aspect of the international
  financial system is the growth of capital flows
  among nations.

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Capital Market Liberalization

• Advocates of liberalized capital flows argue that
  unhindered capital flows allow savings to flow to
  their most productive use, resulting in the
  development of real resources and higher
  productivity.
• Financial market imperfections may result in
  capital misallocations and financial instability.

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Financial Instability and Financial Crisis

• Financial instability is when market
  imperfections and policy created distortions
  result in a situation in which the financial
  sector is unable to allocate funds to their most
  productive use.
• A financial crisis is a situation where a
  nations financial system is no longer able to
  function. A crisis typically involves a banking
  crisis, and currency crisis, and a foreign debt
  crisis.

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Capital Flows and Financial Crisis

• International capitals flows consists of
  short-term or portfolio capital flows, and
  long-term or foreign direct investment flows.
• An excessive reliance on portfolio capital can be
  destabilizing and may contribute to financial
  crises.

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Multilateral Policymaking

• The two organizations at the center of efforts to
  stem international financial crises are
• The International Monetary Fund a multinational
  organization the promotes international monetary
  policy cooperation, exchange arrangements, and
  economic growth.
• The World Bank A sister institution that
  specializes in making loans to developing nations
  to promote development and growth.

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Can these Organizations Predict a Crisis?

• To predict a crisis, policymakers must have an
  idea of their cause. Potential sources of
  financial crisis are
• An inconsistency between the exchange rate and
  economic fundamentals.
• Speculative attacks.
• Structural moral hazards.

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FDI and Developed Nations 60 of FDI are flows
between developed nations. After the Financial
Crisis at the end of the 90s, 70 of flows went
to developed countries.
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Cross Border Mergers and Acquisition Mergers
occur when a firm absorbs the assets and
liabilities of another firm and an acquisition
when it purchases these. MA activity is also
concentrated between developed nations. During
the last half of the 90s, MA activity grew by
250.
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Emerging Economies Since 1990, average flow
per year to developing countries is 150 billion
per year. Western Hemisphere Mexico, Brazil,
Argentina, large portfolio capital inflow prior
to 1994-95 Financial Crises ? After that FDI
increased. Asian Countries Development aid was
reducing and FDI increasing, as well as some
portfolio until Financial Crises of 1997 after
which other forms of aid increase and FDI
continued.  
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Developing Countries FDI DATA 2000 2001 2002
125 125 108 Portfolio 2000 2002  
16 8     (Billions of US )
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Role of Capital Flows in Recent Financial
Crises     MEXICAN CRISIS Portfolio Capital
increased, Dollar denominated debt increased,
rising current account deficit, fixed exchange
rates, led to sudden devaluation. Large IMF
bailout occurred
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ASIAN CRISIS In Asia, Capital flows increased
from 1.4 of GDP (1986-90) to 6.7 of GDP
(1990-96) Thailand it was 10.6 of GDP and came
from offshore borrowing by banks and private
corporations. Portfolio was 1.6 and FDI was
1.1 of GDP. In Indonesia, Korea and Thailand,
private corporations were the main forces behind
borrowing abroad, not governments.
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CHARACTERISTICS OF THESE ECONOMIES High
economic growth -Financial Sector deregulation
including capital account deregulation -Nominal
exchange rates pegged to the dollar with
limited variation (Thailand, Malaysia, Korea,
Philippines) or predictable change
(Indonesia) -Governments gave incentives to
borrow abroad
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Unpredicted Crises No signs from economy,
investors, government, IMF, international rating
companies Failure of large companies, real
estate bubbles Crashed, Banks failed, suddenly
currencies in Thailand, Indonesia, Korea, and
Malaysia collapsed
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Other causes Bank Failure Corporate
Failure Political Uncertainty Contagion
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Russia in August, 1998 Attracted much foreign
capital Inflation under control, growth looked
good Sudden devaluation of ruble and inability to
pay back debt Brazil in Jan. 1999 High fiscal
deficits in local currency Large foreign capital
inflows (high interest rats) Large current
account deficits Good rates of growth Speculative
attacks on currency
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• Can the current international financial system be
  restructured?
• ?Change to FDI and restrict short term flows
• have Tobin Tax (EU and Canada)         
• ? Data Transparency 
•    ?Financial Sector Restructuring
• ?Contingent Credit Lines from IMF
•          ? Early Warning Systems
• ? Involving Private Creditors in accepting bad
  debt,
• restructuring, and special steps to provide new
  credit lines with better payment (who would
  enforce this.. Newinstitution?)