Financial Crises in Emerging Markets: An Essay on Financial Globalization and Fragility

Article excerpt

By Alexandre Lamfalussy. New Haven, CT: Yale University Press. 2000. Pp. 220. $25.00 hardcover.

This book, is "must reading" for business economists, investment professionals, and anyone concerned with the interaction between financial markets and the real economy, both in the United States and in emerging markets. The book is a pithy and penetrating analysis of the four major financial crises--Latin America 1982-83, Mexico 1994-95, Southeast Asia 1997-98, and Russia from 1998--that affected recent global financial markets. I particularly like Lamfalussy's balanced assessment of the causes of these crises, with attention paid to inappropriate policies in the industrialized countries as well as in the emerging markets. His conclusion that globalization--while speeding economic development in emerging market countries--has made our financial world riskier is an important warning for the future.

Alexandre Lamfalussy was born in Hungary and now lives in Belgium. He worked with the Bank for International Settlements from 1976 until the end of 1993, when he retired as the general manager, a post he held from 1985. During this period he "had the opportunity to observe from close quarters the development of bank supervisory and regulatory practices" (e.g. the BIS capital standards) and actively participated in the efforts by G-7 central banks to prevent the financial crises in emerging markets from leading to a global financial crisis. This experience gave him special insights into the role played by international bank lending in increasing financial instability.

After his retirement from the BIS, he was appointed head of the European Monetary Institute (which prepared the way for the European Central Bank) and confirmed unanimously by the European Parliament. During his three and one-half years at EMI, he nursed the fragile concept of European monetary union with persuasion and solid analysis. After his retirement from this post in June 1997, he was invited to give the 1998 Henry L. Stimson Lectures at Yale, which he did in March and April of that year. This book is based on those lectures and represents the distillation of years of experience in the private sector, at the BIS as a bankers' banker, and finally in helping to bring the euro into being. He has been honored with a barony by the Kingdom of Belgium.

One of the nice features of this book is its conciseness. In 175 pages, Lamfalussy provides an overview of the four crises cited above, describes their common features, discusses the role of financial globalization in aggravating the crises, provides some sensible advice on crisis prevention and crisis management, and concludes with some cogent observations and prescriptions for the future. Along the way he makes a number of points that, once expressed, seem so obvious that the reader is ashamed not to have thought of them before. One of them, "that the process of financial globalization aggravated all four crises and, if left unattended, would be likely to contribute to the eruption of new crises in emerging markets" should be taken to heart by the managers of high-yield bond funds who have been investing heavily in emerging market debt.

Another point, obvious in retrospect, is that there is a fundamental "disproportion," in Lamfalussy's words, between the size of an emerging market's GDP and financial system compared to the lending and investment capacity of the financial systems in the developed countries. …