Globalization Hazard and Delayed Reform in Emerging Markets

Capital inflows to emerging market economies rose to unprecedented heights in the first part of the 1990s and then collapsed very rapidly in the second. Such volatility could partly be explained by financial vulnerability in the emerging markets themselves, but the global nature of the phenomenon raises the suspicion that the world financial market is wrought with systemic problems that are largely independent of the individual countries affected. This paper puts forward the conjecture that phenomena such as contagion could stem from the way the capital market operates (for example, crises generated by margin calls). These systemic phenomena require systemic instruments. Unfortunately, few are available. The International Monetary Fund (IMF) operates more like a fire department than like a central bank. Liquidity is sprayed where fire is found, not on the system as a whole in the manner of a central bank faced with a liquidity crisis.