Discussion

The discussion focused on questions of political economy and the role of financial markets. Dani Rodrik echoed the concerns raised by Yung Chul Park by asking whether the global financial architecture being constructedis actually compatible with the kind of institutional diversity that Park presented. Rodrik also questioned whether developing countries were getting more investable resources out of enhanced capital mobility. Morris Goldstein's comments raised the possibility that the good old-fashioned debt-dynamics equations yield answers on sustainable debt stocks that are too generous.

Martin Evans asked why the political economy in these countries does not allow for changes in policy when times are good. Alternatively, Evans said, it could be that it is the financial markets that get it wrong by not assessing the risk correctly. If that is the real question, he continued, then the discussion's policy focus ought to be directed on why the markets are incorrectly assessing the risk—a completely different set of policy issues from the traditional international macroeconomic issues.

Susan Collins raised the market flexibility issue. That topic did not get a lot of play in this discussion. But in many other discussions about the restructurings that are needed when countries are recovering from crises, market flexibility plays a key role. Labor market flexibility was an important issue in the Argentina discussion, but not in the discussion about Asian countries, Korea in particular. Collins also wondered about the role of exchange rate regimes in setting off vicious and virtuous cycles. It remained unclear to her whether the choice of an exchange rate regime can allow a country that is in a vicious cycle to somehow jump-start a virtuous cycle. Managed flexibility with inflation targeting, of the sort Goldstein discussed, can help avoid crises, but it is not obvious that it is necessarily part of the package that shifts a country to the virtuous growth cycle.

Sidney Weintraub asked Park whether the argument that East Asian countries need reserves, and hence export promotion, as their safety valve implies that they should have complex input protection in order to be able to have trade surpluses and undervalued exchange rates. Park responded that most of the countries are still on International Monetary Fund (IMF) programs, and they are not allowed to impose any kind of input restrictions whatsoever, so that is neither a policy or an option they can entertain. Direct export promotion is out of the question. But these countries will have to maintain some kind of export competitiveness, and that is a major reason why they continue to intervene in foreign exchange markets.

Barry Bosworth said that Argentina was not a good example of a political economy problem. The problem in Argentina was that the economists did not agree. There was a lot more uncertainty at the time among economists about what was the optimal policy to follow. Bosworth echoed Rodrik's concern that if there are not going to be large capital flows to these countries, what is the benefit of having a very open capital system? Rodrik added that the situation is even worse, as many countries are putting a dollar in reserves for every dollar they are borrowing, which in view of the interest differential implies making an outward resource transfer.

Kristin Forbes brought up the presentations' contrasts on financial and banking systems. Park focused on the weakness of the financial systems in Asia. One of the lessons of the Asian crisis was how important it was to have strong financial systems in order to better respond to crises and alleviate the impact of an initial crisis. But Argentina has very well-capitalized banks and strong financial systems—and that did not help alleviate the crisis. It raises the question whether it was right to draw the lesson from the Asian crisis that a strong financial system is critically important in dealing with financial crises. Forbes pointed out that Goldstein did not spend very much time talking about the...