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Economics

Chapter 13 Reading Summary. Fearful of Finance

In 1996, the author immediately says Indonesia, Malaysia, the Philippines, South Korea, and Thailand were in a situation where they were spending considerably more than was their gross national income. In as small amount of time as two years, this ever-growing deficit had actually turned their economies into surpluses.

During the period of crisis in these East Asian countries, the average loss in GDP was 8.1%. However, in the year 1999, these countries were able to do something astonishing–begin a swift and efficient economic recovery effort never before seen. The year saw an average GDP growth of 7% ; as well as a 7.3% in 2000. By 2001, the five countries by average had a 13% increase in the GDP reported in 1996, before the collapse occurred at all.

Although this is in some ways encouraging, the author goes on to cite about 130 different banking or currency crisis’ in both emerging and high-income countries between 1973 and 1997. In addition, the author notes here that the authors of the above study, Michael Bordo of Rutgers University and Barry Eichenstein of the University of California at Berkeley, argue that “relative to the pre-1914 era of financial globablization, crises’ are twice as prevalent today.”

The author then goes on to further solidify his point: because the East-Asian crisis was not seen ahead of time (because the developing countries had been growing consistently for years prior), personal, rather than national debt accrued quickly. It is no secret to the working conditions of these deregulated countries right up to this day, which could account for not only their recovery nationally, but their poverty levels.

Although the crisis in East Asia was largely averted on an international level, the author uses this example to cite a concrete example as to how globalization can affect multiple markets. The author specifically cites Russia, Brazil, and the United States as victims of the East Asian crash. Our interconnectivity in finances has direct impacts on the economy of other countries. According to the author, for a globalized economy to function, more international regulations must be employed.

The author later goes on to cite the oil crisis in the United States in the 1970’s as a concrete example. One of the primary causes of Mexican economic collapse in the 1980’s–it, like its Asian counterparts, recovered quickly–before tanking again. For markets that are just emerging as international powerhouses, that also marked two major crashes in one generation–perhaps the reason Mexico is in the predicament it is currently in.

It is interesting that the author, using a quote from the IMF itself, seems to criticize capitalism as an international system. Citing a system that sounds more like a global market based on the principles of socialism, the author and IMF advocate many of these principles. Some examples cited include transparency of information and business tactics, reducing capitol costs through enhanced transportation and cooperation, as well as making “specialized economies” more diverse and enhancing foreign business contacts. The author cites this as not being feasible due to social, cultural, and governmental differences–it does not lend itself to universal change.

In addition, another thing the author alludes to with regards to much needed change is the IMF itself. The IMF has consistently failed to appropriately adjust interest rates consistent with what international markets call for. In fact, as in any other organization that spans the globe, the IMF is equally as susceptible to outside pressure. Influences such as global economic corruption can explain this lack of action, or taking the wrong action in certain cases. Recently, the IMF has been accused of inflating the global interest rates–ironically similar to the way America’s bubble burst a few years ago. With economies now tanking all over the world, the IMF’s lack of action and regulation is a direct cause.

Much of the rest of the reading is devoted to the very challenging and loaded question of when the IMF, or the international community, should bail out a failing nation. There are many things to consider when this question arises.

How did the nation get that way? Are they subject to a dictator or socio-economic policy that lends itself to failing again? Will international aid be squandered, as has happened so frequently in the past?

On the other hand, can the international community allow another nation to fail? When the United States’ housing bubble burst, economic ripples were felt globally.

The main idea is we cannot have it both ways; an increasingly globalized market makes nations interdependent, making the market of one nation literally invested in many others. This needs to either stop, or lend itself to regulation not before seen on a global scale.