Academic journal article The Economic and Labour Relations Review : ELRR

Financial Crises and Globalisation

Academic journal article The Economic and Labour Relations Review : ELRR

Financial Crises and Globalisation

Article excerpt

Drawing on lessons learnt from an analysis of why Australia was not subject to the same degree of contagion from the Asian crisis as were our near neighbours, this paper looks at what elements of reform to the international economic architecture are desirable and why. These include: wider representation in the economic councils of the world, in part to give more legitimacy to the rules of the game; bailing in the private sector both for equity reasons and to reduce moral hazard as well as to contribute to solving the immediate problem; far reaching prudential rules e.g. restrictions on banks' short term borrowing and on foreign currency denominated borrowing; the possibility of controls on short term capital inflow; and greater transparency with increased disclosure by all major participants including hedge funds.

As part of the debate on the Asian crisis, two separate views emerged to explain the crisis--those who blamed deficiencies in the crisis countries themselves (cronyism, corruption, misguided policies and so on), and those who found intrinsic flaws in the international capital markets.

Time has brought some perspective to these issues, and a consensus is emerging that a variety of problems contributed. Not surprisingly with complex and multiple causation, there are lots of things to be fixed. The domestic/international dichotomy is still a useful one, here, because it allows us to focus exclusively on the international issues, without implying that the domestic deficiencies were unimportant. A conference on 'Reinventing Bretton Woods' lends itself to exclusive focus on the international aspects, and, if 'reinventing' is needed, something must have gone wrong with the old structure of discussion, rule-making and crisis response.

The focus, in this paper, is on Australia, but we need to put this in a wider context to draw out the lessons for ourselves, and for others:

* Why were we in Australia not subject to the same degree of contagion as our near neighbours?

* as participants in the debate on reforming the international economic architecture, what elements of reform should Australia be promoting?

1. Why Australia Escaped

There were certainly serious concerns, 18 months ago, that the Asian crisis would do significant damage to Australia. But it was not a concern about contagion and a repeat of the Asian problems--in the form of a major reversal of capital flows. Rather, the issue was that our international environment would be unfavourable, with stunted growth in our export markets, particularly in the region which had provided us with such a useful stimulus over recent decades. As things have turned out, domestic demand has remained strong (with very little adverse confidence effects from Asia), and the lower exchange rate effectively buffered us from the worst aspects that had been expected. But it is worth emphasising that no-one, as far as I know, ever expected Australia to be sucked down into the same financial maelstrom--our adverse impacts were expected to be from secondary effects. It was always clear that we would avoid the direct contagion, because we were not subject to the fatal combination that had infected Asia--the interaction of large and volatile capital flows, with a fragile domestic financial sector. The capital flows to Australia are nothing like as volatile (and are not even as large): but, more importantly, we did not have a fragile domestic financial sector.

It is true that Australia is very dependent on international capital inflow, with an average current account deficit of around 4 1/2 per cent of GDP for the last couple of decades. These flows are large, but nothing like the flows experienced in Asia: in 1996, for example, Thailand received capital flows equal to 13 per cent of its GDP. Just as important, the capital inflows that funded the Australian deficit were, by-and-large, quite stable. Even in the mid-1980s 'Banana Republic crisis', which saw a large change in the value of the Australian dollar, the most that the current account adjusted in any one year was a little under 2 per cent of GDP (in 1986/87). …

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