STOCK MARKET WATCH -- Tuesday, 8 October 2013

[Demeter]

29. TPP pact requires regulated financing

http://www.bangkokpost.com/opinion/opinion/373437/tpp-pact-requires-regulated-financing



World leaders who are gathering for the Apec summit in Indonesia had hoped to be signing the Trans-Pacific Partnership Agreement (TPP). The pact would bring together key Pacific Rim countries into a trading bloc that the United States hopes could counter China's growing influence in the region.

But talks remain stalled. Among other sticking points, the US is insisting that its TPP trading partners dismantle regulations for cross-border finance. Many TPP nations will have none of it — and for good reason.Not only does the US stand on the wrong side of experience and economic theory, it is also pursuing a policy that runs counter to the guidelines issued by the International Monetary Fund. That is especially noteworthy, as the IMF used to be considered the handmaiden of the US government in such matters for quite a few decades. Unfortunately, its newfound independence and insight has not yet rubbed off on the US government.CThat surprising development aside, the US government could learn a few lessons from the TPP countries when it comes to overseeing cross-border finance.

As shown in a new report that I co-authored with Katherine Soverel, Ricardo French-Davis and Mah-Hui Lim, TPP nations such as Chile and Malaysia — one in the Americas, one in Asia — successfully regulated cross-border finance in the 1990s to prevent and mitigate severe financial crises. Their experience proved critical in the wake of the 2008 financial crisis, when a global rethink got underway urgently regarding the extent to which cross-border financial flows should be regulated. Many nations, including Brazil and South Korea, have built on the example of Chile and Malaysia and have re-regulated cross-border finance through instruments such as taxes on short-term debt and foreign exchange derivative regulations.

It is only prudent that, after the global financial disaster of 2008, emerging market nations now want to avail themselves of as many tools as possible to protect themselves from future crises. New research in economic theory justifies this. Economists at the Peterson Institute for International Economics and Johns Hopkins University have demonstrated how cross-border financial flows generate problems because investors and borrowers do not know (or ignore) the effects their financial decisions have on the financial stability of a particular nation. In particular, foreign investors may well tip a nation into financial difficulties — and even a crisis. Given that constant source of risk, regulating cross-border finance can correct market failure and also make markets work more efficiently. This is a key reason why the IMF completely rethought its earlier position on the crucial issue of capital flows. The IMF now recognises that capital flows bring risk — particularly in the form of capital inflow surges and sudden stops — that can cause a great deal of financial instability. Under such conditions, the IMF will now recommend the use of cross-border financial regulations to avoid such instability.

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