Financial markets spark heated debate
March 31Sparking one of the most heated debates of the weekend, panelists in one of Saturday's afternoon EPIIC panels discussed "The Peril and Promise of Financial Markets: Asia and Latin America." Drawing on the competing theories surrounding the downfall and future of the Asian and South American economies, five economists focused on the causes of the recent Asian economic crisis. Paul Blustein, a financial reporter for The Washington Post, argued that the proliferation of short-horn investors - who move money around quickly - as opposed to the establishment long-horn investors - who have a larger stake in the country - caused many of the problems in Asian and Latin American countries."When the short-horns are euphoric, they drive lots of investment and make governments complacent," Blustein said. "But when times are no longer good, they pull out very quickly, leading to economic downfalls."While Blustein repeated this theory from New York Times columnist Thomas L. Friedman's book The Lexus and the Olive Tree, panelist William Overholt, Executive Director for Asian Research at Harvard, said the disappearance of foreign investment was not so much to blame as banks, under governmental direction, blindly backing businesses. In countries like Thailand, Overholt said, banks threw so much money into companies that they did not spend it wisely or effectively. "When you waste money on that scale, most companies can't pay back the banks," he said. In 1997, Overholt explained, a large number of Japanese banks pulled out their investments and all Asian countries felt the brunt. "It had a lot to do with local corruption, bank failures... it had almost nothing to do with short-horns," he said. Overholt claimed to have "been in the trenches" during the Asian recession, where the situation looked drastically different from how it seemed to "people writing about it thousands of miles away." Blustein later asked Overholt if that reference was directed at him, and Overholt denied the suggestion. The two panelists had a short but heated debate over the existence of a recession in Hong Kong and the true role of the pullouts of the Japanese banks. Tufts economics professor David Dapice spoke on the pitfalls of international aid in these countries' financial markets. Foreign aid encourages bad investments, he said, whereas local development would encourage the country to use their money wisely. "Some investments are like the Big Dig," Dapice said. "If they [the country] get more money, they'll use aid for good projects and they'll use their money for the Big Digs... so what is aid really financing?" To encourage more long-lasting reforms, foreign countries need to funnel more than money into developing countries. "I think we should think more about how to change the minds of these regimes rather than simply give them more resources," he said. Ricardo Hausmann, an economics professor at Harvard's Kennedy School of Government, spoke on the causes of financial turmoil, rejecting the popular moral hazards theory, which posits that companies become irresponsible because they know foreign aid or banks will bail them out. The response to this, in many cases, is to simply not invest in developing countries. "It's avoiding financial crisis by avoiding finance," Hausmann said. "It's like trying to avoid population growth by avoiding sex. There's got to be a better way." If contracts were better enforced, Hausmann said, the financial repercussions would not be so harsh. At the end of the panel, Overholt briefly addressed inequities, the symposium's overarching theme, in response to an audience questioning the absence of the topic from the discussion. "In financial crises, of course, the poor hurt the most and we need to do everything we can to minimize the consequences," he said. However, financial crises also "cleanse the system," Overholt said. "We need these crunches," he said. "Thailand needed to learn the rules, like Enron needed to learn the rules."
