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Policy Area Papers on Financial regulation

The Globalisation of Corporate Governance and Implications for African Corporates in a Changing Regulatory Landscape
Hippolyte Fofack, World Economics, December 2017
Adopting global corporate governance standards remains a challenge for most corporates in developed and developing economies, but shareholder capitalism is probably set on an irreversible growth path. The growing number of African corporate entities abiding by global corporate governance standards, despite the regulatory costs associated with compliance, is a positive development. The short-term costs in trade finance, financial intermediation and banks’ balance sheets are outweighed by the long-term benefits of adopting global corporate governance standards. Improving compliance requires better data and in Africa an initiative led by the African Export-Import Bank aims to provide centralised single sources of the primary data required to conduct customer due diligence checks on African counterparties.
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The Universal Credit Rating Group: Measuring Debt Ethically
Daniel Cash, World Economics, December 2016
The Universal Credit Rating Group (UCRG) is a collection of rating agencies that are aiming to redress what they see as an imbalance in the provision of credit ratings across the global economy. This article describes the UCRG and discuss as its chances of succeeding in its goal of offering a viable opposition to the Big Three rating agencies. What is proposed by this article, is that although the Group provide a welcome narrative, the foundation to their endeavour is potentially lethal to their chances of success.
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Data on Indicators of Governance: Handle with Care
M.G.Quibria, World Economics, June 2016
This article provides a select review of data used as indicators of governance. Despite the popularity and considerable success of the existing body of governance indicators in putting the spotlight on governance inadequacies in developing countries, they are fraught with a whole host of statistical and measurement issues. It argues that these indicators should be applied with caution, keeping their shortcomings in mind.
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What Have We Learned From the Global Financial Crisis of 2008-09 and its Aftermath?
Anthony Elson, World Economics, June 2015
This article summarizes a number of key lessons from the effects of the global financial crisis that, with the passage of time, are having an important impact on views about global financial stability, macroeconomic theory and policy, income inequality and the role of the international financial architecture (IFA). The crisis followed a period of rapid growth in financial globalization that largely escaped the governing capacity of the IFA and coincided with a benign view of the limited role for government regulation given the self-disciplining power of financial institutions and the inherent stability and self-correcting capacity of capitalist market economies. The crisis has confirmed the important role for government policies in promoting economic recovery and minimizing or reversing the negative distributional effects of the crisis, although little has been done to deal with income inequality. Also, strong intergovernmental coordination has been required to correct major defects in the IFA.
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Quicksilver Markets
Theodore Berg, World Economics, June 2015
One of the missions of the Office of Financial Research is to analyse asset market valuations and if there are excesses, explore the potential financial stability ramifications of a sharp correction. The author argues that U.S. stock prices today appear high by historical standards. Although he notes that the financial stability implications of a market correction could be moderate due to limited liquidity transformation in equity markets, he addresses other financial stability issues that may be more relevant, such as leverage, compressed pricing of risk, interconnectedness, and complexity.
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Taking Stock of Microfinance
Antara Haldar & Joseph Stiglitz, World Economics, June 2015
This paper explores the current global turmoil in microfinance in the context of the problems that have arisen at SKS Microfinance in India. The authors argue that the roots of the current crisis lay in the attempt to scale-up the original “Grameen” model of microfinance set up in Bangladesh I order to establish profit-seeking bodies which have neglected the core value of trust underlying successful initiatives. Unfortunately, corrective steps may exacerbate existing problems. The founders of microfinance may have overestimated the impact of microfinance in abolishing poverty, but the hasty regulation that has been imposed to address some of the setbacks experienced in India, may only undermine further trust between borrowers and lenders. Undoubtedly, microfinance institutions have has an impact on economic exclusion, social change and on community building, but future growth in the sector may require a reversion to its original not for profit foundation.
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African Diaspora Remittances are Better than Foreign Aid Funds: Diaspora-driven development in the 21st century
Adams Bodomo, World Economics, December 2013
In this article, two sources of socio-economic development finance for Africa, African Diaspora remittance funds and Overseas Development Assistance (ODA) funds, are compared. It is argued that Diaspora remittance funds constitute a better alternative to ODA funds for the development of Africa for a number of reasons. Not only have Diaspora remittance funds outpaced ODA funds, but they are more efficiently deployed for the development of the African continent in three main ways. The funds are less likely to be misspent as compared to the misappropriations and legendary inefficiencies in the foreign aid industry. Diaspora remittance funds, as gifts of love, are better focused on building the family and hence the nation. The distribution of these Diaspora remittance funds is far more efficient than ODA funds since these monies go directly to paying school fees, building houses and growing businesses. Some proposals are made to indicate how African governments can facilitate more remittance funds over and above ODA funds.
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Remittances and their Macroeconomic Impact: Evidence from Africa
Mthuli Ncube & Zuzana Brixiova, World Economics, December 2013
This paper examines the macroeconomic trends, drivers and the impact of remittances in Africa. First, it documents the increasing share of remittances relative to other foreign capital flows to Africa, the distribution of remittance inflows across countries, and some key properties. This is followed by an analysis of the macroeconomic drivers of remittances in recipient countries, such as the level of income, inflation and nominal exchange rate depreciation. Specifically, remittances are positively impacted by higher income, but deterred by an unstable macroeconomic environment, pointing to the investment motive in remitting to Africa. The paper also examines the role of remittances in funding Africa’s external balances. Finally, drawing on the case of Egypt, the paper shows the positive impact that rising remittances can have on public debt sustainability.
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Strengthening the Early Warning Exercise: Enhancing IMF and FSB coordination
Bessma Momani, Skylar Brooks, Michael Cockburn, Warren Clarke & Dustyn Lanz, World Economics, September 2013
Following the 2007–2008 global financial crisis, the G20 leaders tasked the International Monetary Fund (IMF) and the newly created Financial Stability Board (FSB) to jointly undertake Early Warning Exercises (EWEs) in order to identify vulnerabilities within the global financial system and encourage appropriate policy responses. This paper argues that a series of challenges have prevented the EWE from realizing its full potential. In particular, the advantages accruing from the joint nature of the exercise have not been fully realized. The paper then puts forward recommendations intended to improve the process and encourage implementation of EWE findings among national policymakers.
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Cross-Border Financial Integration in Asia and the Macro-Financial Policy Framework
Philip R. Lane, World Economics, June 2013
In relative terms, Asia came through the global financial crisis relatively well. In part, this can be attributed to its conservative approach to international financial integration. At the same time, financial globalisation means that Asia cannot be fully insulated from international financial shocks. Moreover, it is likely that the rest of the world will undergo a redesign of its international financial profile, such that Asia will also have to adapt. All in all, there is likely to be considerable convergence in the composition of international balance sheets across Asia and the rest of the world. In turn, this is likely to be associated with a higher degree of regional financial integration within Asia. These structural changes call for the careful design of a prudential macro-financial policy framework.
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The International Liquidity Crisis of 2008–2009
William A. Allen & Dr Richhild Moessner, World Economics, June 2011
The ‘credit crunch’ that began in August 2007 turned into a crisis when Lehman Brothers failed in September 2008. That event caused large international capital flows, including heavy repatriation of dollars to the United States. Central banks, led by the Federal Reserve, augmented the supply of international liquidity through bilateral central bank swap facilities, and thereby prevented the crisis from becoming much worse. We discuss the reasons for establishing swap facilities, the risks that central banks run in extending swap lines and the limitations to their utility in relieving liquidity pressures. We conclude that the credit crisis is likely to have a lasting effect on the international liquidity policies of governments and central banks.
Global Financial Crisis: A mid-year review of progress to date
Priya Nandita Pooran, World Economics, September 2010
This article reviews the degree of progress in financial regulatory reform and proposes new areas for inclusion in the reform agenda. It assesses the changes and responses to the proposed structure in the European Union and further discusses current responses to the financial crisis and new regulatory issues that require attention in the global reforms.
Paying the High Price of Active Management: A new look at mutual fund fees
Ross M. Miller, World Economics, September 2010
Financial economists have long known that actively managed mutual funds underperform comparable index funds and that investment management fees are a major contributor to this underperformance. This article shows that the impact of mutual fund fees is even greater when one examines what funds actually do with investors’ money. Many actively managed mutual funds have returns that are closely correlated with comparable index funds and yet have annual fees that can be 100 times higher. Because such ‘shadow’ or ‘closet’ index funds provide minimal active management of the assets they hold, the implied annual cost of the active management can dwarf the stated cost. This article provides a simple measure of what investors are actually paying fund managers for that active management that they can compute for themselves data available for free on the Internet. A recent sample of 731 actively managed large-cap US mutual funds has an average active expense ratio of 6.44%, more than 400% greater than their average reported expense ratio of 1.20%. This article also finds that even large, seemingly low-cost, mutual funds common in retirement plans frequently have active expense ratios above 4% a year.
George Soros’ Reflexivity and the Global Financial Crisis
Thomas D. Willett
World Economics, June 2010
There is no summary available for this paper.
The International Financial Architecture: Yesterday, today and tomorrow
Onno de Beaufort Wijnholds, World Economics, June 2010
The global financial crisis requires a global solution. A deep-seated overhaul of the international financial system is needed, but could be frustrated by political wrangling, particularly in the United States, but also in the European Union. Moreover, international coordination is complicated; without it there will be no level playing field and the resulting distortions could have serious consequences. The international monetary system (IMS) has come out of the crisis relatively unscathed, but is vulnerable to large-scale attacks on major currencies. Global imbalances have been temporarily reduced, but continue to pose a challenge in coming years. In order to strengthen the IMS and to accommodate the desire for diversification of official reserves, the proposal for an SDR Substitution Account (SA) that would allow central banks to convert excess dollar holdings into SDRs should be revived and streamlined. Eliminating the present dollar overhang and avoiding its recurrence in the future would benefit all major players in the world economy. The problem of exchange rate risk run by an IMF-administered SA could be eased by ring-fencing part of the IMF’s gold for that purpose. Ultimately, world reserves could consist of roughly one-third in dollars, euros and SDRs.
Finance, Technology and Multinationals from the Periphery: An analysis of the Latin American experience
Edmund Amann & Werner Baer, World Economics, March 2010
This article analyses the emergence of Latin American multinational corporations (MNCs), with a particular emphasis on the roles of finance and technology. It is established that the need to acquire foreign technology and finance has played a key role in the emergence of Latin MNCs. However, in respect to technology at least, the internationalisation process is also increasingly predicated upon the exploitation of domestically generated assets.
Global Imbalances, the Financial Crisis and the International Monetary System
Ignazio Visco, World Economics, March 2010
Even though the proximate causes of the crisis lie in previous financial excesses, the extent to which these have developed owes much to fundamental sources of vulnerability present in the global macroeconomic environment. However, imbalances and asset price misalignments went on basically unchecked, reflecting a climate of general macroeconomic optimism and the confidence in the ability of policymakers to cope with critical conditions in financial markets. The limits of the existing policy set-up, the main challenges ahead and the importance of rebalancing global demand in order to achieve a more sustainable pattern of economic growth at the world level are examined in this article. The risks of disorderly exchange rate movements and possible implications for the international monetary system are considered, and the exit from the exceptional monetary and fiscal stimulus currently in place are discussed, with the view that while supporting the recovery care should be taken not to create new sources of financial instability.
Narrow Banking
John Kay, World Economics, March 2010
The credit crunch of 2007–8 was the direct and indirect result of losses incurred by major financial services companies in speculative trading in wholesale financial markets. The largest source of systemic risk was within individual financial institutions themselves. The capital requirements regime imposed by the Basel agreements both contributed to the problem and magnified the damage inflicted on the real economy after the problem emerged. The paper argues that regulatory reform should emphasise systemic resilience and robustness, not more detailed behaviour prescription. It favours functional separation of financial services architecture, with particular emphasis on narrow banking – tight restriction of the scope and activities of deposit-taking institutions.
The Systemic Regulation of Credit Rating Agencies and Rated Markets
Amadou N.R. Sy, World Economics, December 2009
Credit ratings have contributed to the current financial crisis. Proposals to regulate credit rating agencies focus on micro-prudential issues and aim at reducing conflicts of interest and increasing transparency and competition. In contrast, this paper argues that macro-prudential regulation is necessary to address the systemic risk inherent to ratings. The paper illustrates how financial markets have increasingly relied on ratings. It shows how downgrades have led to systemic market losses and increased illiquidity. The paper suggests the use of ‘ratings maps’ and stress-tests to assess the systemic risk of ratings, and increased capital or liquidity buffers to manage such risk.
The IMF, the Credit Crunch and Iceland: A new fiscal saga?
Sheetal K. Chand, World Economics, September 2009
Iceland was badly hit by a fundamental mismatch between the assets and international liabilities of her banking system, with severe consequences for the welfare of the population. The country now has an International Monetary Fund programme. The paper asks three questions of the programme: Is it too tight? Is the balance of payment’s target appropriate? How will the country cope with the potentially huge transfer problem associated with the now frozen external liabilities of the failed Icelandic banks? The paper notes several problems, and argues that an appropriately structured and expanded fiscal policy is needed, together with burden sharing between Iceland and the international community.
The Secret of Canadian Banking: Common Sense?
Laurence Booth, World Economics, September 2009
This article looks at the basic reasons why the Canadian banking system was recently judged by the World Economic Forum to be the soundest in the world. It does so by first examining the basic functions of a financial system and what Canadian banks are allowed to do as intermediaries within that system. It then considers the market structure of Canadian banking and the role of the Canadian government in regulating the financial system. It finishes with a discussion of the four basic management areas of any financial institution: liquidity management, asset management, liability management and capital management. On all dimensions the Canadian banks seem to be conservatively managed, well regulated and operating in a benign economic environment without obvious systemic risks, mainly due to the absence of a competing ‘parallel’ intermediation system as exists in the United States.
Understanding Crime, Political Uncertainty and Stock Market Returns: A case study of the Colombian stock market
Juan Carlos Franco Laverde, Maria Estela Varua & Arlene Garces-Ozanne, World Economics, June 2009
Colombia’s economy has experienced positive growth over the past few years despite the incidence of serious armed conflict in the region. However, the Colombia of today still faces a significant degree of sociopolitical instability as a result of organised crime associated with drug trafficking, the leftist guerrilla attacks and the right-wing paramilitary group. This paper examines the significance of organised crime and political uncertainty for the amalgamated Colombian Stock Exchange. Empirical evidence indicates that organised crime and political uncertainty negatively affect stock market returns and volatility.
The World Financial Crisis: New economy, globalisation and old-fashioned philosophy
F. Gerard Adams, World Economics, March 2009
The world financial crisis of 2008 is a consequence of new financial technologies, new accounting methods and new international linkages. These developments have come at a time when governments have returned to an old-fashioned free market philosophy. This paper links the systemic financial/economic crisis of 2008 to the new economy developments, globalisation and policy philosophy perspectives of recent decades. It raises the question of how to re-establish confidence once traditional thinking has been questioned.
Sweden’s Bank Nationalisations: Are there lessons for today?
Fredrik Erixon, World Economics, March 2009
Many banks are on the verge of bankruptcy and have received support from the government to stay afloat. Measures taken have not sufficed, and an increasing number of economists and commentators are calling for the nationalisation of banks in the United Kingdom and United States. In their advocacy, they use Sweden as an exemplar, suggesting that massive bank nationalisation was the way it fixed its collapsing banking sector in the early 1990s. This account of Sweden’s resolution policy is erroneous and exaggerates the role of nationalisation. Sweden successfully combated a banking crisis, and two banks received full government ownership. The main example of nationalisation, however, was a financial reconstruction of a bank already controlled by the government. The only real example of nationalisation of a privately owned bank hardly offers lessons for ways to resolve the current banking crisis.
Singapore’s Sovereign Wealth Funds: The political risk of overseas investments
Friedrich Wu, World Economics, September 2008
This paper examines Singapore’s two sovereign wealth funds (SWFs)-the Government Investment Corporation of Singapore (GIC) and Temasek Holdings (Temasek)—and the political risks which they are exposed to in their overseas investments. Wu argues that Temasek has hitherto exposed itself to a greater level of political risk than GIC, but is in turn rewarded with a higher rate of returns on its investments. At the same time, he finds that political risk is an inevitable challenge for SWFs in general. In fact, as worldwide opinion has turned towards demanding greater transparency and accountability from SWFs, the political risks faced by SWFs have correspondingly risen. The paper seeks to throw some light on this issue by undertaking a case study of Singapore’s two SWFs, which are consistently ranked among the global top 10 SWFs by assets, and have attracted much worldwide attention in recent times as a result of some of their politically controversial overseas investments.
The Sovereign Wealth Funds of Singapore
Anthony Elson, World Economics, September 2008
This paper examines the origin, evolution and recent operations of Singapore’s two sovereign wealth funds, Temasek Holdings (TSK) and the Government Investment Corporation (GIC). Singapore is a unique case in that it has two of the oldest and largest sovereign wealth funds. Both funds reflect a long history of sound macroeconomic fundamentals and strong fiscal discipline on the part of the Singapore government. The two funds have significantly different operating features and governance structures. TSK operates like an equity investment firm with significant independence in its day-to-day operations from the government and a relatively high degree of transparency; by contrast, GIC operates like an asset management company, under tight control by the government and with a relatively low degree of transparency. The paper concludes with some lessons from Singapore’s experience with its sovereign wealth funds for the on-going debate about the role of such funds in the international financial system.
Risk-Pricing and the Sub-Prime Crisis
Andrew G. Haldane, World Economics, September 2008
As the sub-prime crisis celebrates its first birthday, what lessons have been learnt? The crisis was rooted in a misperception problem among end-investors, facilitated by financial engineers selling “tail risk” products. Contrary to the precrisis rhetoric, this tail risk was often transferred to those least able to manage and price it. Once crisis struck, bank balance sheets needed to be repaired. The article argues that the authorities have a key coordinating role to play in ensuring individual bank balance sheet adjustments strengthen, rather than weaken, the financial system as a whole. A credit crunch-an uncoordinated credit contraction—is an example of what policy should be seeking to avoid. Finally, the article considers two medium-term prophylactic policy measures-countercyclical regulatory policy and central trading, clearing and settlement of systemically-important financial instruments. On both theoretical and practical grounds, there are good reasons for believing their time may have come.
Trends and Challenges in Islamic Finance
Heiko Hesse, Andreas (Andy) Jobst & Juan Solé, World Economics, June 2008
The paper first discusses the current trends in Islamic finance, which has become mainstream with currently more than US$800 billion of assets worldwide and a buoyant market for sukuk bonds. However, this exorbitant growth raises many challenges, particularly in the areas of banking, capital markets and regulation. Thus, the paper then considers these challenges, notably the economic and legal bottlenecks of sukuk, banking-specific issues, such as liquidity risk management and business models, as well as disharmonized financial regulation. Despite the challenges, the paper concludes that the Islamic finance industry has a bright future.
Islamic Economics and Finance
Rodney Wilson, World Economics, March 2008
This article provides an introduction to key concepts and methods involved in an Islamic approach to business, investment, risk taking and insurance. The prohibition of riba (interest or usury) profoundly influences the way business transactions and investments are made and financial contracts must comply with Islamic law or shariah. Underlying all economic and financial transactions from an Islamic perspective is a moral dimension, with the authoritative source of guidance being the Holy Quran, the revealed word of Allah, and the Hadith, the sayings and practices of the Prophet Muhammad and his companions, referred to as the Sunnah. Notably there is a concern about the justice of outcomes for individuals. A valuable contribution of the Islamic finance industry-with over one trillion dollars’ worth of assets designated as shariah compliant-is the issues it raises about morality and social accountability in financial dealings and the challenge it poses to conventional assumptions.
The Future of Financial Regulation
Howard Davies, World Economics, March 2008
In light of the recent turmoil in global financial markets and criticisms of the performance of the regulatory system, Sir Howard Davies-who prior to his current appointment as Director of the London School of Economics was Chairman of the Financial Services Authority, the UK’s single financial regulator-gives a preliminary assessment of where there is a case for change in the rather complex global regulatory system. He identifies seven interesting and difficult questions for central banks and regulators concerning the financial markets upheaval: Did the Fed cause the problem? Is this a broader crisis of Anglo-Saxon capital markets? Is there a fundamental problem in the subprime mortgage market in the United States? Is there a fundamental problem with the credit ratings agencies? Do we need a new approach to liquidity? Is the UK’s regulatory system fundamentally flawed? Does the crisis reveal flaws in the international regulatory system? His answer to the latter question is a qualified yes. Improvements can be made, but the recent events have provided a vivid demonstration of the importance of a robust regulatory framework surrounding capital markets.
Sovereign Wealth Funds: What they are and what’s happening
Stephen Jen, World Economics, December 2007
Sovereign Wealth Funds (SWFs), much in the news of late, are a new and growing class of funds that are already large in size, and will likely grow very rapidly in the coming years. How they will operate, both in terms of their portfolio allocation and the way in which the managers of these funds communicate and interact with the private sector will have great implications for the financial markets. The author addresses some of the key features and implications of SWFs including how big they are, their likely investment strategies, their possible impact on the financial markets, the risk of financial protectionism arising as a political reaction, and issues of transparency of the funds (greater transparency by the SWFs could help restrain the rise of financial protectionism).
European Financial Market Integration: Distant dream or nascent reality?
Patrice Muller, World Economics, September 2004
European Monetary Union and a vigorous legislative agenda have profoundly changed the environment in which the European financial services industry operates. These developments should have contributed to a deepening of financial market integration in the European Union, especially within the Eurozone. However, actual progress has been very uneven. Eurozone money markets and bonds markets have achieved full or a very high level of integration. Eurozone equity markets show increasing signs of integration, although substantial barriers to cross-border trading remain. Bank credit markets, with the exception of inter-bank lending, and insurance and funds industries, remain still largely fragmented along national lines.
Blueprint for Public Company Reform
Edward Gottesman, World Economics, December 2003
The crisis of confidence in corporate governance and the opacity of public company reporting are growing concerns. These flaws in the market system have been highlighted by the stock market bubble and pose a threat to orderly capital flows. Reform is needed, but legislation may have little effect and can carry unintended consequences. Better solutions can be found by examining the way in which private companies are directed and the type of financial and operational reports they use for budgeting and control. Institutional investors, bankers, professional advisers and Boards of Directors can implement the changes needed to provide more reliable information for valuation of public company securities and to counteract the casino mentality that infects capital markets.
China’s Capital Market: Better than a casino
Stephen Green, World Economics, December 2003
Throughout the 1990s, China’s stock market was developed as a tool of industrial policy. It was used to supply capital to state-owned enterprises (SOEs) that remained controlled by the state and whose performance usually declined after listing. Secondary market trading was poorly regulated, again partly for political reasons. As a result, the market has become infamous for extreme volatility, price manipulation and grossly unreliable accounting. This is a problem for the government since the stock market is ill-equipped to support the government’s other increasingly important economic priorities. The government now needs to improve the efficiency of industry in order to sustain employment creation, to raise capital to finance its own liabilities and to put into place a modern pension system. As a result, China’s stock market is being slowly reformed. Listed companies are quietly being allowed to privatise. The regulatory framework has been rationalised. The empowered China Securities Regulatory Commission is pushing forward with a range of policies aimed at improving corporate governance. Shareholders have been allowed to pursue civil compensation claims against firms in the courts. Financial intermediaries are being privatised, the fund sector is being rapidly expanded and foreign investors are gradually being allowed in. These changes, although deeply unpopular among some important groups, will mature the market over the next decade.
James Tobin, 1918–2002
An interview with introduction by Brian Snowdon & Howard Vane
World Economics, September 2002
Professor James Tobin, who died on 11 March 2002, was possibly the most eminent of the world’s ‘Keynesian’ economists. Described by Nobel Laureate Paul Samuelson as “the archetype of a late-twentieth century American scholar”, Tobin was without doubt one of the most influential economists of his time who inspired a whole generation of students. In this interview, Professor Tobin discusses the progress and development of economics in the second half of the twentieth century.
The Puzzle of the Harmonious Stock Prices
Randall Morck & Bernard Yeung, World Economics, September 2002
A peculiar pattern is evident across the stock markets of different countries. In emerging markets, such as Peru and China, all the stocks in the country tend to rise and fall together in the course of ordinary trading. But in developed countries, such as Denmark and Canada, stocks move independently. What seems to determine how independently a country’s stock prices move is not the size of its market, the diversification of its economy, the stability of its macroeconomic policy or factors relating to the behaviour of individual firms. Rather, stock prices move more independently in countries that are less corrupt.
Some Facts about Hedge Funds
Harry M. Kat , World Economics, June 2002
Hedge funds promise investors the best of both worlds: superior performance and high diversification potential combined into one. This article discusses a number of recent findings that show that the case for hedge funds is less straightforward than often portrayed. A close look at the available hedge fund return data reveal substantial bias which makes interpretation complex. When using traditional performance measures, this will cause investors to overestimate the expected return and underestimate the risk of hedge funds. As a result, they are likely to overinvest in hedge funds.
Letter from Buenos Aires
Pierre Wassenaar, World Economics, March 2002
“IMF criminals!” cry the antiglobalists in the wake of Argentina’s descent into chaos. But the real crime of Argentina’s last ten years was its own supineness in tying its fortunes for so long to the economy of an indifferent superpower, and allowing itself to become the plaything of international bondholders. There are two bogeymen here: a hubristic and arrogant political class which never felt the need to explain to the population the Faustian nature of the dollar peg; and the international credit rating agencies which called Argentina a basket case and sent the cost of its debt soaring, when both its fiscal deficit and its debt ratio were within the limits for entry into the eurozone.
Capital Controls: The experience of Malaysia
Jomo K.S., World Economics, March 2002
Malaysia’s decision to adopt capital controls in September 1998 reminded the world that there are alternatives to capital account liberalisation. Unfortunately, there has been a tendency for both sides in the debate over the capital control measures to exaggerate their own cases, with little regard for what actually happened. After examining the cases made, and the actual events surrounding the imposition of capital controls, the author concludes that the contribution of the controls to Malaysia’s subsequent recovery cannot be conclusively established. At worst, the controls may have discouraged not only foreign portfolio investment, but also foreign direct investment—which may adversely impact Malaysia’s medium-term competitiveness vis-à-vis the new industrialising economies of Asia, including China and India.
Stock Markets and Central Bankers: The economic consequences of Alan Greenspan
Stephen Wright, World Economics, March 2002
There is a near-consensus that central bankers should focus their attention on the control of inflation, and should accordingly not pay attention to movements in stock markets. This view is reinforced by the continuing influence of the Efficient Markets Hypothesis (EMH), which maintains that financial markets correctly price firms at all times. The authors assert that this general view is incorrect. There are strong reasons, both in principle and in practice, to doubt the applicability of the EMH to the valuation of the stock market as a whole. Indicators of stock market value, such as q, show the market to have been severely overvalued at the end of the twentieth century. Previous episodes of overvaluation have been succeeded, both in the US and Japan, by severe recessions. Such recessions raise the risk of central banks losing control of inflation, due to liquidity traps; they also impose costs, in terms of output and inflation, which central bankers should take into account. Finally, central bankers already do in any case take these into account, but asymmetrically: only when markets fall, not when they rise.
Cohabiting with Goliath: How small equity exchanges will survive in the future
Avinash Persaud, World Economics, December 2001
The surviving legacy of the Long Term Capital debacle of October 1998 is an increased preference for liquidity among international investors. This process has a self-fulfilling element with liquidity following investors out of the less liquid markets and into the more liquid. A closer examination of this issue, however, suggests liquidity is not just an issue of size. There is some evidence that some markets have become bigger, yet thinner. In this paper the author focuses on the characteristics that can be used to better identify liquidity risk when a crisis hits.
Keywords: Crises, Crisis, Liquidity, LTCM     Download Paper
What Happened to the Washington Consensus?
Graham Bird, World Economics, December 2001
At the beginning of the 1990s it appeared that there was considerable agreement about the kind of economic policies that countries turning to the IMF and the World Bank should pursue. These included macroeconomic stabilisation, microeconomic liberalisation and openness, and were summarised by the concept of a ‘Washington Consensus’. How has the Consensus stood up to the passage of time? This article briefly assesses the track record of Consensus-type policies and shows how the Consensus has evolved. With regards to some of its components, a greater sense of agnosticism may now prevail. Moreover, issues that were little or no part of the Consensus have come to the fore. The implications of these changes for institutional design are also investigated.
Bad Market Days: Lessons from the stock market crashes of 1929 & 1987
Harold Bierman, World Economics, September 2001
There are a large number of misconceptions regarding the great stock market crash of 1929 and the crash of 1987. Both crashes occurred when the general level of business was good and getting better. In 1929 there were very few hints that the great depression was two years away. In fact, in recognition of the favourable business climate, by the end of 1929 the market had recovered most of its October losses and was down only 11.9% from its highs (the major losses were to occur in 1930–1932). There were several causes of the 1929 crash. Two of the most important causes were the campaign by the Federal Government against the orgy of speculation taking place in New York City and an action by the Public Utility Commission of Massachusetts that triggered a collapse of inflated public utility stock prices. That, in turn, triggered a collapse of other stock prices.
Redefining the Role of the State: Joseph Stiglitz on building a ‘post-Washington consensus’
An interview with introduction by Brian Snowdon
World Economics, September 2001
An interview with introduction by Brian Snowdon
Professor Joseph Stiglitz is without question one of the world’s leading economists. In his extensive research he has made seminal contributions to the analysis of the economic consequences of incomplete information and uncertainty. This work has greatly enhanced economists’ understanding of the welfare properties of markets and the sources of market failure. His research has also contributed to the development of better microeconomic foundations for Keynesian macroeconomic models. Most recently Professor Stiglitz has been heavily involved in controversial public policy debates relating to the East Asian crisis, problems of transition from communism to capitalism, the limitations of the ‘Washington consensus’, and globalisation and development. A common theme in all of these debates relates to the role of government and legitimate borders of the state in both developed and developing economies. In this article/interview Professor Stiglitz gives his views on these and several other important global issues.

Economic Globalisation: How far and how much further?
Ramkishen Rajan & Graham Bird, World Economics, September 2001
The concept of globalisation has received a great deal of popular attention in recent years. However, the term is often used quite loosely. When defined to mean closer international economic integration, the evidence shows that the extent of globalisation may easily be exaggerated. This article examines the evidence and assesses the benefits from, and costs of, globalisation. It goes on to discuss how the costs might be mitigated, and briefly examines the role of the principal international trade and financial institutions.
The Rebirth of the Corporate Bond Market
Bill Robinson, John Raven & Christopher Chua , World Economics, June 2001
There has been a major switch from equity to debt finance in recent years, associated with a fall in the long-term rate of interest. The paper explores the macro-economic causes of the sea change in interest rates (lower budget deficits, independent central banks, lower inflation expectations) and the micro-economic consequences. Firms are taking on more debt partly for tax reasons and partly because at lower interest rates they have better interest cover. This means they can increase their borrowing at lower risk and hence at lower cost. An examination of a cross section of UK firms from the FTSE 350 shows two major influences on the debt-to-value ratio of large firms. Firms with healthy cash flow are allowed to borrow against that income; and firms whose income is relatively invariant across the economic cycle (as measured by a low asset beta) can afford a higher level of debt.
Keywords: Debt, Equity, Tax     Download Paper
IMF Programmes: Is there a conditionality Laffer Curve?
Graham Bird, World Economics, June 2001
The long-standing debate over IMF conditionality has received a new lease of life in the context of the debate over a new international financial architecture. Conditionality has increased in recent years and some proposals for reform envisage a continuation of this trend. However, by emphasising the importance of implementation as well as design it may be argued that increased conditionality will have a negative effect on final out-turns; there may be a conditionality Laffer curve. The policy issue is whether conditionality has reached or gone beyond its optimal level. There is some evidence that is consistent with the claim that conditionality has become excessive.
Sending the Herd off the Cliff Edge: The disturbing interaction between herding and market-sensitive risk management practices
Avinash Persaud, World Economics, December 2000
In the international financial arena, policy makers chant three things: market-sensitive risk-management, transparency and prudential standards. The message is we do not need a new world order, just to improve the workings of the existing one. While many believe this is an inadequate response to the financial crises of the past two decades, few argue against this line. Perhaps more should. There is compelling evidence that in the short run, markets find it hard to distinguish between the good and the unsustainable, market players herd and contagion is common. In this environment, market-sensitive risk management and transparency can destabilise markets.
The International Economic System in the Twentieth Century: An interview with Barry Eichengreen
Brian Snowdon, World Economics, September 2000
This wide-ranging discussion takes in globalisation, the causes of the Great Depression (and the likelihood of future recurrences), the Marshall Plan and post-war European recovery, growth in the 1950s and 60s followed by the problems of the 70s, and the strengths and weaknesses of the current international financial system, among other subjects. It provides a stimulating introduction to factors underlying important events in the history of the twentieth century and prospects for the century we have just entered.
Response to Professor Bird
Allan Meltzer, World Economics, September 2000
Allan Meltzer responds to Graham Bird’s article "Sins Of The Commission: The Meltzer Report On International Financial Institutions" [World Economics, Vol.1, No.3, July-September 2000]. In that article, Bird argued that the International Financial Institutions Advisory Commission’s conclusions and recommendations for reform focused on the wrong issues, were unfairly critical of the IFI’s and their policies over the last 25 years and if implemented as policy would seriously detract from the development of the institutions and damage efforts to develop the world’s poorest countries. In his reply to Bird’s criticisms, Allan Meltzer, Chairman of the Commission, says the belief of Commission members was that a different framework with new approaches is necessary for the institutions to be more effective and that the need for change is evident, including greater weight on crisis prevention. Meltzer charges that Bird in his article has not addressed the facts that since 1982 the institutions have not prevented one financial crisis following another, recent crises have threatened the stability of the global financial system and poor countries have got poorer, and that he has offered no evidence to refute the Commission’s criticisms of the institutions’ policies and poor performances.
Sins of the Commission: The Meltzer Report on international financial institutions
Graham Bird, World Economics, September 2000
In the aftermath of the East Asian financial crisis there has been much discussion of a new international financial architecture. A significant contribution to this debate is the Report of the International Financial Institution Advisory Commission, sponsored by the US Congress, which was chaired by Allan Meltzer and published in March 2000. The Commission makes a number of radical proposals for reform. Professor Bird argues that unfortunately the analysis underlying many of them is flawed, or at least highly dubious. Reform based on the Commission’s recommendations would therefore be largely ill-directed; it would be bad news for developing countries and countries in transition, and could lead to greater global instability. An alternative approach to reform exists which attempts to modify the IFI’s operations in ways that build on the lessons of experience rather than simply discontinues them, as the Meltzer Commission recommends.
Is there a Case for an Asian Monetary Fund?
Graham Bird & Ramkishen Rajan, World Economics, June 2000
The East Asian financial crisis has spawned a number of proposals for institutional reform. Some envisage reforming existing institutions, particularly the International Monetary Fund (IMF), while others suggest that new institutions are needed. Amongst them is the idea of establishing an Asian Monetary Fund (AMF). Evaluating this proposal raises a number of complex issues. Its appeal hinges on whether it would be able to undertake some functions better than the IMF. To the extent that crises are regionally contained, there may be a case for mobilising finance to help deal with them at the regional level. This could also take pressure off the constrained resources of the IMF. In as much as access to finance from an AMF would be conditional upon compliance with specified standards and policy guidelines, an AMF might also help to prevent a future financial crisis in the region.
Proposals for a better International Financial System
Stephany Griffith-Jones, World Economics, June 2000
This paper analyses three essential functions of global financial market management that currently are not properly met, and could best be met by new institutional developments: 1. prudential regulation; 2. provision of official liquidity to countries or markets in crises; and 3. emergency orderly work-out procedures. The paper reviews progress achieved regarding needed reform of the international financial architecture since 1998. It concludes that, although important progress has been made, it is urgent for further necessary measures to be taken. This is because recent crises have had an unacceptably high cost, especially for developing countries, and have discouraged future private investment, both by national and foreign investors.