Gabriel Palma *
The ultimate social function [of financial markets are] spreading risks, guiding the investment of scarce capital, and processing and disseminating the information possessed by diverse traders […]. Prices will always reflect fundamental values […]. The logic of efficient markets is compelling.
L. H. and V.P. Summers (1989)
[Stock market valuations are the product of ] the mass psychology of a large number of ignorant individuals that is liable to change violently as the result of a sudden fluctuation of opinion of factors which do not really make much difference to the yield.
J. M. Keynes (1936)
In the last two decades of the twentieth century there were four major financial crises in the Third World: the 1982 debt crisis (affecting particularly Latin America, with the Chilean economy the worst hit in the region); the 1994 Mexican crisis (and its repercussions throughout Latin America, especially Argentina, commonly known as the 'Tequila effect'); the 1997 East Asian crisis, and lastly the Brazilian one (in 1999). 1 The main common characteristic of these financial crises is that the economies most affected were those that had previously undertaken the most radical processes of financial liberalisation. Furthermore, these countries had not only liberalised their capital accounts and domestic financial sectors, but had done so at a particular time of both high liquidity in international financial markets, and slow growth in most OECD economies; that is, at times when a rapidly growing, highly volatile and largely under-regulated international financial market was anxiously seeking new high-yield investment opportunities.
These recurrent financial crises, which repeatedly took most business and academic observers by surprise (particularly in the cases of Mexico and Korea),
* An earlier version of this chapter was presented at a workshop on 'The New World Financial Authority' organised by the Center for Economic Policy, The New School for Social Research, NewYork, 6-7 July 1999.