Book Plug: Fixing Global Finance

I’ve an awful lot of research papers that I want to highlight, in addition to going through the ETP proposals in detail. As such there won’t be any posts for the next couple of days, so in the interim, I’d just like to showcase a book and a working paper that supports it.

Back in July, I highlighted an article on VoxEU regarding the imposition of capital controls in East Asia. The author got in touch with me, and has now published a book on the subject:

Fixing Global Finance
A Developing Country Perspective on Global Financial Reforms
Kavaljit Singh

The financial crisis which erupted in mid-2007 has been widely viewed as the most serious financial crisis since the Great Depression of the 1930s. The crisis which originated in developed countries quickly spread to developing countries and the rest of the world. The turbulence in financial systems was followed by a significant reduction in real economic activity throughout the world. The crisis has highlighted that financial markets are inherently unstable and market failures have huge economic and social costs. The crisis has renewed debate on the role of global finance and how it should be regulated.

The aim of this book is to encourage and stimulate a more informed debate on reforming the global finance. It examines recent developments and problems afflicting the global financial system. From a developing country perspective, it enunciates guiding principles and offers concrete policy measures to create a more stable, equitable and sustainable global financial system. Several innovative measures have been proposed to reform the global finance and to ensure that it serves the real economy.

I haven’t read it yet – one more for the reading list – but it’s a free download for a limited period (direct pdf link here, publisher’s site here). Worth going through, especially in light of the “currency wars” going on right now.

Interestingly enough, here’s a working paper that came out yesterday in the latest batch of research from the NBER, that underscores the issues raised in the book (abstract):

Composition of Capital Flows: A Survey
Koralai Kirabaeva, Assaf Razin

We survey several key mechanisms that explain the composition of international capital flows: foreign direct investment, foreign portfolio investment and debt flows (bank loans and bonds). In particular, we focus on the following market frictions: asymmetric information in capital markets and exposure to liquidity shocks. We show that the information asymmetry between foreign and domestic investors leads to inefficient investment allocation and borrowing in a country that finances its domestic investment through foreign debt or foreign equity. Exposure to liquidity shocks due to the mismatch of debt maturity may induce banking crises and cause sudden reversals of short-term capital flows. When there is asymmetric information between sellers and buyers in the capital market, then due to the adverse selection foreign direct investment is associated with higher liquidation costs than portfolio investment. The difference in exposure to liquidity shocks (in addition to asymmetric information) can explain the composition of equity flows between developed and emerging countries, and the patterns of foreign direct investments during financial crises.

Translation: short-term portfolio flows suck.

Technical Notes:

1. Kavaljit Singh, "Fixing Global Finance: A Developing Country Perspective on Global Financial Reforms", Madhyam, 2010 (pdf link)
2. Kirabaeva, Koralai & Assaf Razin, "Composition of Capital Flows: A Survey", NBER Working Paper No. 16492, October 2010