Home » Opinion » Book review
Crisis helps correct economic miracles
By Wan Lixin |
April 10, 2010, Saturday
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Print Edition
Print Edition
RECENTLY there has been considerable speculation on when China's housing market will experience the much needed corrections.
One analysis, based on a study of the timeline of Japan's property bubble, concludes that the market will collapse next year.
Experts are quick to dismiss such predications as simplistic, citing the differences - demographic, economic, political - between the two countries.
But it is probably not alarmist talk that astronomical growths usually lead to serious structural imbalances, which call for corrections.
Postponing the turning point (which is what a crisis is about) without coming to grips with the deepseated imbalances can only make a crisis more spectacular.
Hopefully a study of crises that have happened before can alert our policy makers to their responsibility and obligation in terms of long term national interests.
Alexandre Lamfalussy's "Financial Crises In Emerging Markets" examines four recent crises (Latin America, '82, Mexico '94, Asia, '98 and Russia '98).
Lamfalussy was president of the European Monetary Institute from 1993 to 1997 and has served as general manager of the Bank for International Settlements (BIS) during some of these crises.
According to the author, all the above crises were preceded by over-enthusiasm by foreign investors, over-lending by foreign institutions and a huge buildup in emerging market debts.
Crisis occurred because there is no simple solution to these inherent imbalances.
"The process of globalization throws up problems of worldwide dimension which cannot be handled on an ad hoc basis," the book says.
All four crises started with a persistent inflow of huge capital, which creates large current account deficits and unsustainable external debt.
Pegging local currencies to the dollar proved dangerous.
"Pegging the exchange rate to the US dollar turned out to be a pretty explosive device for both Mexico and the Asian countries," observes Lamfalussy.
As banks are taking ever larger risks in globalization, the author cautions the policy makers to hold off on deregulation unless they really understand market behavior.
Globalization aggravates these crises, partly because emerging market countries got their priorities wrong.
They have liberalized capital flow before they had in place a solid institutional foundation.
Over-exuberance helped drive asset prices and leverage to unsustained levels.
The belief that technology can help tighten control is wishful thinking.
"The violence of the bursting of a debt or asset price bubble most likely increases with the speed and generalization of information," the book observes.
There is much truth in the observation that most economic miracles are flawed.
When a turning point (crisis) is inevitable, be consoled that crisis helps by correcting policy mistakes and redistributing resources.
Some describe this year as one of the most difficult for China.
In my understanding it is difficult because the problems are increasingly perceived to be more political than economic.
By comparison a purely financially induced crisis will be much more simple.
Take the country's runaway home prices.
The prices now no longer have anything to do with fundamentals, demand, and supply, but have become purely speculation about government intentions.
A recent series of critical comments on China's real estate sector by the official Xinhua news agency - later found not to be dictated by the leadership - is a barometer of surging public sentiments.
Fueling growth by inflating the bubbles is little different from slaking thirst by drinking poison.
All bubbles burst.
One analysis, based on a study of the timeline of Japan's property bubble, concludes that the market will collapse next year.
Experts are quick to dismiss such predications as simplistic, citing the differences - demographic, economic, political - between the two countries.
But it is probably not alarmist talk that astronomical growths usually lead to serious structural imbalances, which call for corrections.
Postponing the turning point (which is what a crisis is about) without coming to grips with the deepseated imbalances can only make a crisis more spectacular.
Hopefully a study of crises that have happened before can alert our policy makers to their responsibility and obligation in terms of long term national interests.
Alexandre Lamfalussy's "Financial Crises In Emerging Markets" examines four recent crises (Latin America, '82, Mexico '94, Asia, '98 and Russia '98).
Lamfalussy was president of the European Monetary Institute from 1993 to 1997 and has served as general manager of the Bank for International Settlements (BIS) during some of these crises.
According to the author, all the above crises were preceded by over-enthusiasm by foreign investors, over-lending by foreign institutions and a huge buildup in emerging market debts.
Crisis occurred because there is no simple solution to these inherent imbalances.
"The process of globalization throws up problems of worldwide dimension which cannot be handled on an ad hoc basis," the book says.
All four crises started with a persistent inflow of huge capital, which creates large current account deficits and unsustainable external debt.
Pegging local currencies to the dollar proved dangerous.
"Pegging the exchange rate to the US dollar turned out to be a pretty explosive device for both Mexico and the Asian countries," observes Lamfalussy.
As banks are taking ever larger risks in globalization, the author cautions the policy makers to hold off on deregulation unless they really understand market behavior.
Globalization aggravates these crises, partly because emerging market countries got their priorities wrong.
They have liberalized capital flow before they had in place a solid institutional foundation.
Over-exuberance helped drive asset prices and leverage to unsustained levels.
The belief that technology can help tighten control is wishful thinking.
"The violence of the bursting of a debt or asset price bubble most likely increases with the speed and generalization of information," the book observes.
There is much truth in the observation that most economic miracles are flawed.
When a turning point (crisis) is inevitable, be consoled that crisis helps by correcting policy mistakes and redistributing resources.
Some describe this year as one of the most difficult for China.
In my understanding it is difficult because the problems are increasingly perceived to be more political than economic.
By comparison a purely financially induced crisis will be much more simple.
Take the country's runaway home prices.
The prices now no longer have anything to do with fundamentals, demand, and supply, but have become purely speculation about government intentions.
A recent series of critical comments on China's real estate sector by the official Xinhua news agency - later found not to be dictated by the leadership - is a barometer of surging public sentiments.
Fueling growth by inflating the bubbles is little different from slaking thirst by drinking poison.
All bubbles burst.
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