Fri, Sep 18, 2009 - Page 9 News List

Global financial reform hinges on emerging markets

By Barry Eichengreen

The implication is that emerging markets, while encouraging foreign banks’ entry, should at the same time strictly regulate such banks’ local lending practices. And, since strict regulation, if adopted unilaterally, might simply cause foreign banks to shun a country, emerging markets need to put up a united front.

Finally, emerging markets need to redouble their efforts to build bond markets, but on a local basis. Countries with more developed bond markets experienced less negative fallout from the crisis, since their large firms retained access to non-bank sources of finance.

But opening those markets to foreign investors, which has been the dominant strategy for developing them, was a mixed blessing. South Korea, the Asian country with the largest share of foreign investment in its securities market, also experienced the sharpest price and exchange-rate declines as those investors, mainly hedge funds, were forced to deleverage and repatriate their funds.

Encouraging participation by foreign investors is a quick way to jump-start local bond market activity. But recent experience suggests that quickest is not best. Regulations limiting foreign participation to prudent levels should be part of the new international regime.

The next chair of the G20 will be South Korea. Emerging markets should start preparing now to ask it for the floor.

Barry Eichengreen is a professor of economics and political science at the University of California, Berkeley.

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