Book Review: Financial Crisis, Contagion, and Containment

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Financial Crisis, Contagion, and Containment: From Asia to Argentina. 2003 (hardcover) and 2014 (paperback). Padma Desai


In Financial Crisis, Contagion, and Containment: From Asia to Argentina, Padma Desai addresses necessary considerations about rising market economies’ compatibility with inherently unstable world monetary markets. Desai is the Gladys and Roland Harriman Professor of Comparative Economic Systems and director of the Center for Transition Economies at Columbia University. She adopts a comparative middle–periphery framework for exploring each the origin and decision of economic crises, presenting proof from the United States, Japan, the European Union, and numerous rising market economies. The e-book’s nontechnical type will attraction not solely to students and college students but in addition to practitioners.

Desai’s comparative perspective highlights the variations between bigger developed economies and smaller rising market economies. For instance, she states that “the lack of institutional and structural readiness of the borrowing economies in the periphery for absorbing capital inflows can best be contrasted by examining the preparedness of the economies in the center for voluntarily attracting these flows and maintaining stable economic growth.” Throughout the e-book, Desai expresses provocative criticisms of International Monetary Fund (IMF) coverage prescriptions in its try and maintain free capital mobility for crisis-ridden economies.

The e-book offers a important account of the monetary and financial crises that negatively affected Southeast Asia, Russia, Latin America, and different areas following the July 1997 devaluation of the Thai baht. Retracing the historical past of the 1997–98 East Asian monetary disaster, additionally known as the “Asian contagion,” Desai argues that the area’s opening to the free circulation of capital was inspired by personal and institutional lenders within the world financial system’s US-led developed middle. Financial turmoil ultimately ensued within the smaller, weak peripheral economies. The dislocations included Russia’s default on its authorities debt and devaluation of the ruble in August 1998, Brazil’s devaluation of the true in February 1999, and the 1998–2002 Argentine Great Depression.

Desai’s panoramic theme comprises 4 key propositions. First, some economies, corresponding to that of the United States, are higher ready to get well from a slowdown or recession than smaller, peripheral economies.

Second, the financial issues of the 1990s within the developed middle had been homegrown and their decision domestically pushed. In distinction, peripheral economies’ monetary crises originated from outdoors their borders.

Third, the untimely opening of rising market economies to capital flows from the developed middle relied on the idea that these peripheral economies had related absorptive capability to developed ones. The developed middle neglected rising economies’ lack of crucial establishments and company practices for traders and debtors to learn in the long run from capital flows.

Fourth, the IMF’s choice for capital flows into rising market economies; its normal prescriptions of fiscal and financial austerity in crisis-swept economies; its lack of flexibility in initiating country-specific coverage responses; and its insistence on such preparations as a floating change price, free capital mobility, and financial coverage independence all create a unfavourable view of its coverage agenda with respect to capital account liberalization in rising market economies. According to Desai, the 1990s crises signify the prices of extending monetary globalization that peripheral economies should bear as a way to reap its eventual advantages.

Unlike developed economies, the rising market economies mentioned within the e-book facilitated monetary and foreign money crises from destabilizing overseas capital flows. These economies struggled with IMF-led coverage prescriptions, which intensified the downturns induced by short-term capital outflows. The writer presents fashions exhibiting the consequences of unstable short-term capital flows in initiating monetary crises and inflicting contagion.

Desai argues that rising market economies with weak establishments and political maneuverability can’t be anticipated to develop crisis-free in a world of unrestricted capital mobility and floating change charges. The e-book focuses on monetary crises whereas recognizing that the IMF has a questionable file in rescuing crisis-ridden economies. Desai contends that monetary globalization is a posh course of that may be harmful. She outlines another strategy whereby lenders from developed international locations and debtors in peripheral economies can profit from the collective positive factors of worldwide capital flows.

The e-book concludes with three suggestions for the IMF:

  • Tailor a versatile coverage framework primarily based on the IMF’s monitoring of borrowing international locations’ monetary sector shortcomings.
  • Adopt floating change price regimes, supported by selective capital account controls, that may confer financial coverage autonomy on rising market central banks.
  • Resolve debt settlement on a case-by-case foundation by both formal IMF engagement within the bailout funding or, ideally, casual backdoor negotiations.

The IMF-led exterior stress embedded in disaster bailout packaging with free capital mobility has not resulted in speedy reform of economic sector inadequacies in peripheral economies. These shortcomings will disappear with various pace in several international locations as governments acknowledge that the brand new practices and establishments of the Anglo-American-style market financial system are price modifying and destroying conventional preparations that constrain collective positive factors from the free circulation of worldwide capital.

In abstract, Financial Crisis, Contagion, and Containment is thought-provoking for financial and monetary practitioners who need to higher perceive monetary crises and the IMF’s attendant coverage responses. Although initially written in 2003, the e-book stays related right now. Practitioners will profit from elevated consciousness of the causes, similarities, variations, and potential cures relating to those financially devastating occasions.

More book reviews can be found on the CFA Institute website or within the CFA Institute Financial Analysts Journal®.

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All posts are the opinion of the writer. As such, they shouldn’t be construed as funding recommendation, nor do the opinions expressed essentially replicate the views of CFA Institute or the writer’s employer.

Mark K. Bhasin, CFA

Mark Okay. Bhasin, CFA, is senior vice chairman of Basis Investment Group, LLC, New York City.

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