the first place
“International Finance”
Please respond to the following: Please answer questions below in 1 paragraph or less. (Please only 1 paragraph or less)
· Based on the Web text materials and article below, address the following: During the global financial crisis of 2007, emerging markets survived the recession by accumulating hundreds of billions of dollars in reserves to ride out the storm. Corruption in these countries, however, has since depleted many of these reserves. Why were these reserves accumulated In the first place and what form does this corruption take?
The Financial Rebalancing Act
Stop Worrying About the Global Flow of Capital
July/August 2011 By Alan M. Taylor
The global financial crisis that began in 2007 has only just begun to recede, but economists and policymakers are already considering its future implications. Has the Great Recession introduced a new economic era? Or was it a temporary shock that will eventually correct itself? The answers to these questions will affect a number of vital economic issues, including the relationship between emerging and developed economies, the direction of international trade and capital flows, and the potential for currency wars or other economic conflicts. Both the recent crisis and the policies that ended it were unprecedented. Compared to other periods of economic turmoil, this crisis was not only unparalleled in scale but also unique in its causes — among them, many argue, global financial imbalances. Basic economic theory presumes that capital will flow “downhill” from capital-rich developed economies to capital-scarce emerging ones, as investors in the first seek profits in the second. Yet over the past 15 years, capital has, on net, flowed “uphill” from emerging economies to developed ones. Although private capital did travel downhill, as conventional wisdom predicts, it was offset by vast government reserves from emerging countries, chiefly from central banks and sovereign wealth funds, heading uphill.
When the recession struck, this unprecedented flow of capital and accumulated reserves suddenly seemed less of a mystery, as emerging markets facing problems began to use the reserves they had accumulated to ride out the economic storm. With that insurance on hand, they defended their currencies, averted capital flight, buffered their financial systems, maintained access to capital markets, and pursued fiscal stimulus programs more successfully than they had during previous episodes of economic turmoil and with greater confidence than some of the developed economies.
Yet although these global imbalances may have helped emerging economies during the financial crisis, many have argued that they also contributed to fueling the financial crisis among developed markets in the first place. The International Monetary Fund (IMF) and the G-20, along with many central banks, finance ministers, and economists, have argued that this “savings glut,” in the words of U.S. Federal Reserve Chair Ben Bernanke, was a key factor in directing capital toward rich countries, lowering real interest rates, and encouraging excessive risk taking by households and investors. Leaders throughout the world have devoted a great deal of energy to ending these global imbalances in the hope of preventing another crisis. U.S. Treasury Secretary Timothy Geithner, for example, proposed a cap last year that would limit capital flows. And the G-20 later attempted to devise a warning system of macroeconomic indicators to identify excessive imbalances. Yet a closer look at both economic history and current trends suggests that even without government intervention, these global imbalances are likely to stop increasing at the same pace and may even decrease. And so, by doggedly emphasizing the importance of these imbalances, economists and policymakers risk fighting the last battle even as a new post-crisis economy emerges with its own set of challenges.
