Wednesday, May 02, 2007

The political economy of emerging markets- book by Javier Santiso

The full title of the book is "The political economy of emerging markets- actors, instituitions and financial crises in Latin America"

This is the second book of Santiso I have read. I liked this book as well as the previous one on the political economy of the possible. my blog on the previous book on 3 september 2006

Perhaps another reason I like his analysis and conclusions is that they coincide with mine. While my conclusions are amateurish, based on my limited knowledge and intuition, Santiso's are those of a solid professional economist based on theories as well as practical experience.

His main conclusion in this book is that the latin american markets alongwith other emerging markets is a "confidence game" played by fund managers and Wall Street. He has described how the fund managers encouraged everyone to invest in Argentina despite the obvious and risky flaws of the argentinian ecnomic and financial structure before 2001. The main motive of the managers was to get fat bonus in the transactions. Ironically some of the same banks which mislead the investors became consultants to the Argentinian government when they wanted to restructure the debt after the crisis. So the bankers made their commission both ways, in the building up of the crisis and in the resolution. The losers are the thousands of bondholders and the Argentinian government and people. I had come to the same conclusion in my article published in Financial Express of 31 December 2005

Other interesting observations and conclusions of Santiso, based on his research and interviews with the players of the Latin America game:

- Latin American countries have been among the most dependent on international bond markets. In mid 2001 bonds represented 70 percent of Argentinian public debt.
- Crisis in latin America had occurred coinciding with the aftermath of the end of the year bonus time of the fund managers. Also the crises coincided with the election times. The governments dont want to spoil their chances by devaluation or some such unpopular measure before elections but do so after the elections.
-Argentina is the only case of a developed country which has gone down into the developing category because of man-made disasters.
-Some of the American academics who advised the Latin American governments were also making money through their interests in funds which played the investment game in those countries.
-many latin american finance and trade ministers and even presidents had studied economics and got even PhDs in American universities and were obviously influenced by the different schools of thought.
- Financial Times is more popularly read than Wall Street Journal by latinamerica fund managers
- Boston has more action than New York in investment in Latin America
- Latin American crises had been triggered or caused by capital flows. Asian countries such as China and India have not faced such crisis since they are integrated globally only through current account trade and services and have controls over capital movements. It would be worthwhile for the the Indian policy makers to keep this in mind and learn from latin america while opening the capital market in india.

Besides analysing the latin american crises, he has gone deep into the evolution of emerging market funds, fund management and the psychology of the fund managers.

Javier Santiso is a politcal economist and is currently working with OECD.

I find him as objective, neutral and balanced in his views.

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