Private sector involvement in financial crisis resolution
Definition, measurement and implementationWilliam R. Cline1
Emerging markets have experienced a long succession of crises in the past seven years, posing major challenges for international policy. Eight major financial crises (Mexico 1995; Thailand, Indonesia and South Korea 1997; Russia 1998; Brazil 1999; Argentina and Turkey 2001) and four notable minor ones (Ecuador, Pakistan and Ukraine 1999-2000; Uruguay 2002) have affected economies accounting for about 52 per cent of total external debt of emerging market economies.
Credit markets have gone from boom to bust in terms of aggregate net lending, although direct investment has held up relatively well and, for a number of sovereigns, market access has remained intact, while for other important borrowers it has been restored.One of the most controversial issues in international policy on crisis resolution has been how to achieve "private sector involvement" (PSI). This chapter seeks to synthesise what has been learned about PSI, and review the main issues that remain in dispute. It proposes relevant definitions for different types of PSI, compiles some broad-brush measurements of how much has occurred, and evaluates which types are beneficial, which are deleterious, and when. First, however, it is useful to review the conceptual framework for financial crisis resolution in emerging markets.
Whether consciously or not, in practice international policymakers have adhered to an analytical framework that runs along the following lines.
|• Temporary official support, often on a large scale, can be appropriate to promote stability and a return of private market confidence, when the country is experiencing a liquidity crisis but is undertaking proper policy adjustments.|
|• It is important to maintain a functioning international capital market for developing countries, because private capital by far exceeds the potential of official development assistance in the task of global development.|