Monday, July 02, 2007

Seems more like to me

Speaking of anniversaries, we are also at the 10th birthday of the 1997 Asian Financial Crisis. Today's WSJ provides bewildering commentary on the lessons of the crisis from a site called

According to them, one important lesson that the US learned from the crisis is "Don't borrow in foreign currency. The US borrows almost exclusively in dollars." Um, excuse me but did the US not know this before the summer of 1997? Is there a major break in the time series of "foreign denominated borrowing by the US government" at that time? Does such a time series even exist? The article gives no data at all to support what to me is a risible claim.

We are also told that emerging markets learned "one big thing" from the crisis, namely "Don't rely on fickle overseas funds". The evidence? "Rather than borrowing, the Asians are now accumulating dollars. Indonesia and Malaysia, two of the crisis countries a decade ago are running trade surpluses of more than 10% of GDP." Sorry, but countries do not directly choose the size of their foreign inflows, unless they impose strict capital controls which none of these guys have done (though the closest to doing so was Malaysia). Current/Capital account outcomes are produced by a combination of the relative productivity of a nation's firms, the relative attractiveness of a nation's markets to foreign investment, and the relative economic policies of the country (though this last factor really can be subsumed into the first two).

It is incredibly simplistic to point to a current account number and claim to be able to say exactly what forces have produced it. One would need to produce evidence that Asian governments are undertaking even more export friendly policies than they did pre-1997 or show that they are actively refusing / discouraging foreign investment funds (a lot of them, not just Malaysia).

In other words, at the level of evidence being considered, one could just as easily say that foreign investors learned one big thing from the crisis, namely not to throw money at fickle emerging markets.