The View | Emerging markets currency crisis is the product of the global liquidity deluge
Anthony Rowley says it is time for an international review of the amount of liquidity flooding the global financial system and the ability of markets, particularly in developing countries, to withstand massive movements of capital
Back in the 1990s, a few years before the Asian financial crisis erupted, I suggested to a senior International Monetary Fund official whom I was interviewing that unrestricted capital flows into emerging markets might not be an altogether good thing. His reply almost took my breath away and I am reminded of it now as we face another possible currency crisis.
It was necessary to expose emerging markets to global capital flows, he suggested, “to test their weak points”. This seemed to me at the time akin to saying that small farms should be connected to massive irrigation pipelines to see whether the ensuing deluge of water would wash them away.
Many countries in Asia duly went ahead and abolished capital controls in line with the neoliberal economic thinking of the “Washington consensus” which also conferred upon emerging markets the mixed blessing of portfolio inflows into and out of their newly established or recently revived stock markets.
Another IMF official cautioned before the 1997 crisis that that idea of “phasing in” capital market liberalisation, in order to test the waters before opening up fully, was not practicable. The denizens of the Washington ivory tower later relented to this view. But, by then, the horse had bolted and many saw little point in closing the stable door.