With aftershocks of the recent global financial earthquake still being felt in some parts of the world, it would be useful to have a set of Early Warning Indicators to tell us what countries are most vulnerable. Nobody should be surprised that it is hard to forecast crises with high reliability; low-risk opportunities for profits are never easy to find. Thus it is especially hard to predict the timing of a crisis. Some economists, however, are skeptical that Early Warning Indicators (EWIs) have any useful predictive ability at all. A common assessment is that EWIs have failed, in the sense that in each historical round of emerging market crises (1982, 1994-2001, 2008) those particular variables that appeared statistically significant in that round did not perform well in the subsequent round. This is not the right conclusion.
Category Archives: emerging markets
Let Greece Go to the IMF
The members of the eurozone and the EU have apparently decided that they must heroically rescue Greece, that this is better than having the IMF do it. Senior figures in Brussels feel that the latter alternative is unthinkable. I am a little confused about why. Martin Wolf writes in the Financial Times this week that to bring in the Fund “would demonstrate that this is not a true union at all.” But the EU and EMU and not true fiscal unions. If the citizens of Germany and other more successful countries were willing to bail out the Greeks, then fine; the EMU would be ready to be a fiscal union. But they are not; so it is not. Given that reality, what is wrong with something that “demonstrates” it?
Achieving Long-Term Fiscal Discipline: A Lesson from Chile
As Chile’s President Michelle Bachelet prepares to hand over power to her newly elected successor, she remains extraordinarily popular. It is worth reflecting on the fiscal aspects of her term in office, as Chile has important lessons for other countries struggling with fundamental long-term budget problems, which includes a lot of countries right now.
As recently as June 2008, President Bachelet and her Finance Minister, Andres Velasco, had the lowest approval ratings of any President or Finance Minister, respectively, since the return of democracy to Chile. (See graphs below.) There may have been multiple reasons for this, but perhaps the most important was popular resentment that the two had resisted intense pressure to spend the receipts from copper exports, which at the time were soaring along with world copper prices. One year later, in the summer of 2009, the pair had the highest approval ratings of any President and Finance Minister since the return of democracy. Why the change?