Razin Economic Policy Lecture: Calm before the storm? Rogoff sees more crises in the offing

• Author: Jaewoo Lee
• Position: IMF Research Department
• Pages: 44-45

Page 44

After a round of snowstorms, like the one that hit Washington, D.C., recently, there is a tendency to want to believe that the worst of winter is over. To Rogoff, a similar mood prevailed at the recent World Economic Forum in Davos, Switzerland, on emerging market debt crises. Many distinguished speakers hoped against hope for the end to debt crises, but there are many reasons, he said, that such a feat may not be within our grasp.

Learning the wrong lessons

For a start, Rogoff expressed concern that economists such as Jagdish Bhagwati, Joseph Stiglitz, and Dani Rodrik are emphasizing the wrong lessons from the Asian crisis. They see clear perils but few gains from opening up emerging markets to private capital flows. But this is deeply misleading, he argued, not least because the main culprit in the financial crises was a fixed exchange rate system. Like a metal umbrella that keeps rain out very effectively until lightning strikes, the fixed exchange rate system often brought about brisk economic growth until a crisis hit.

Moreover, Rogoff observed, integration with the global financial market is indispensable to economic development beyond a certain level. Yes, China and India-aided by capital controls- did escape the Asian crisis relatively unscathed, while Korea-with an open capital market-was hit hard. But that argument holds only so far. China and India had per capita income levels about one-tenth of Korea's, and at some point they, too, will have to cross the bridge and integrate with the global financial market.

Sovereign default and institutions

Rogoff also rejected as naive a view that suggests that the crises of the 1990s could have been averted had different guardians sat at the helm of the international financial system. Sovereign default, he pointed out, is hardly a new phenomenon. It has been with us for more than 500 years and, over the past two centuries, has been associated with emerging markets. In the earlier centuries, these emerging markets were European countries, and they, too, defaulted. Indeed, the all-time record for sovereign defaults (13) is held not by a current emerging market country but by an earlier one-Spain.

Still, Rogoff said, some countries have historically been less capable of bearing debt and more prone to default, and they have defaulted on their sovereign debts...