Essay About Emerging Market Economy And Primary Role Of Financial Linkages

Financial Analyst
2003 may be the first year for a long time not so see an emerging market economy
(EME) crisis. The Asian crisis of 1997 was followed by Russia (1998), Brazil (1999),
Turkey (2000), Argentina (2001) and Brazil again (2002). Measures taken since 1997
seem to have reduced the severity and degree of financial contagion of subsequent
crises; most emerging market economies moved away from fixed exchange rate
regimes; short-term capital flows were much reduced and less volatile, with the
continued use of capital controls by some and their slower removal by others;
leverage was lower; significant changes took place in the investor base, with a sharp
fall in the participation of hedge funds and portfolio flows and a rise in local securities
markets (even in local derivatives markets for the management of financial risks in
periods of high volatility); investors, till recently, seemed to have become more
discriminatory and less herd-like, helped in part by greater transparency in data
policies and strengthened domestic financial institutions including prudential
supervision. Emerging markets are now more stable on account of the lessons learned
since 1997.
But we have also learned the primary role of financial linkages in contagion (trade
linkages play a role but it is secondary), and the central importance of balance sheet
mismatches in generating the conditions for triggering crisis. Apparently-solvent
balance sheets can hide potentially serious liquidity problems. Since 1997 there have
been great changes in the levels and flows of capital to emerging economies. It