The Political Economy of Emerging Markets

• Author: Miguel Diaz
• Position: Director, South America Program Center for Strategic and International Studies
• Pages: 54

Page 54

Markets versus the Masses

Javier Santiso, chief economist for Latin America at Banco Bilbao Vizcaya Argentaria, does a superb job in this book of demystifying the world of emerging markets finance, unmasking it for what it often is: a confidence game. In the best possible way to research his subject, he frequently interviews market practitioners directly. As someone who spent nearly 10 years in these markets, I found that the Rolodex Santiso consults turns up familiar names-global finance is a small world.

Santiso captures well the inherent tension between the nature of the markets and the imperatives facing leaders of the emerging world, who are trying both to develop their economies and to get reelected. Occasionally, the interests of markets and politicians are mutually reinforcing, but for the most part their agendas are at cross-purposes. He notes, for example, that politicians sometimes try to win the confidence of markets by delivering on a few reform policies-generally common to all countries-that the markets deem important. But because markets may have focused on those policies in a capricious manner, politicians may not necessarily be acting in sync with their country's optimal development strategy.

This tension comes to the fore when the election cycle requires politicians to turn their attention to winning over the populace rather than just the markets. In short, there is often an incongruence between the political calendar of governments and the economic calendar of markets. The warning that surfaces from Santiso's analysis is on target: by playing to the expectations of the markets rather than to fundamentals, policymakers are putting at risk, if not undermining, the economic well-being of the people they represent.

Nevertheless, Santiso overplays his hand by coming too close to suggesting that markets are mostly to blame for the ills that have befallen the developing world while the countries themselves are generally guiltless. He is particularly off the mark in portraying Argentina as the victim of...