American University
SIS 596, Spring 2009
Thursdays 5:30-8:00PM
INTERNATIONAL FINANCE AND THE EMERGING MARKETS
Prof. Arturo C. Porzecanski, Ph.D.
Distinguished Economist-in-Residence
Office hours (Clark Hall #108): Tuesdays and Thursdays 2-5PM
Telephones 202-885-1602 and 917-526-3607; E-mail: aporzeca@american.edu
Course description
This course deals with the implications of financial globalization for emerging-market
countries, and specifically with the pros and cons of attracting direct investment and
portfolio flows; the peculiarities of global capital movements, such as “contagion” and
“sudden stop” phenomena; the roles of credit rating agencies and the IMF in facilitating
access to international lenders and investors; the importance of currency and maturity
mismatches; the effectiveness (or not) of controls on capital flows; and the relationship
between capital flows, overindebtedness and sovereign debt defaults.
Our readings consist of the latest empirical and policy writings on the various topics, as
opposed to theoretical papers or classical works from earlier years, and they are drawn
from a variety of authors around the globe that are doing state-of-the-art research. By
the end of the course, students will have an in-depth understanding of the international
financial problems that developing countries should strive to avoid – and of the major
policy implications that follow.
The learning objective of this course, which will be tested in various ways, is familiarity
with the essential vocabulary, analytical tools, theoretical concepts, practical
applications, institutional features, and economic policy aspects of international finance
relevant to the emerging markets.
Course requirements and grading
Students compete for grades with their classmates, and to minimize grade inflation, are
subject to the binding constraint that no more than one-third (1/3) of the class will
receive an “A” or “A-” letter grade – no matter how high or low is the average score of
the class in the individual assignments.
During most of each class, Prof. Porzecanski will lecture on the main ideas conveyed by
the assigned readings, and during the remainder he will guide a class discussion of the
topic at hand. In order to reap the benefits from the course, students should plan on
attending every class and on doing all of the required readings before coming to class,
because credit will be given for class participation. No books need be purchased; all
the required readings are posted on Blackboard. The other course requirements are
two exams to take place on Thursday, March 5 and April 23, respectively and one essay
of a maximum length of 2,000 words, excluding footnotes and the bibliography, written
on one of three topics specified at the end of this syllabus, to be delivered via e-mail by
6AM on Thursday, April 30th at the latest. Class attendance and the quantity and quality
of class participation will contribute to 10% of the final grade; the exams will count for
25% each; and the essay will account for the final 40%.
Schedule and readings
January 15: Background on financial globalization, Part 1
Required readings:
1) Frederic S. Mishkin, “Is Financial Globalization Beneficial?,” Journal of
Money, Credit and Banking, March-April 2007, pp. 259-294.
2) M. Ayhan Kose et al., “Financial Globalization: A Reappraisal,” draft,
December 2006.
3) Barbara Stallings, “The Globalization of Capital Flows: Who Benefits?,” The
Annals of the American Academy of Political and Social Science, March
2007, pp. 202-216.
January 22: Background on financial globalization, Part 2
Required readings:
1) Fernando A. Broner and Roberto Rigobon, “Why Are Capital Flows So Much
More Volatile in Emerging than in Developed Countries?,” in Ricardo
Caballero et al., editors, External Vulnerability and Preventive Policies
(Santiago, Chile: Banco Central de Chile, 2006), pp. 15-39.
2) Laura Alfaro et al., “Capital Flows in a Globalized World: The Role of Policies
and Institutions,” in Sebastian Edwards, editor, Capital Controls and Capital
Flows in Emerging Economies (Chicago: Univ. of Chicago Press, 2007, pp.
19-68.
3) Fariborz Moshirian, “Globalization, Growth and Institutions,” Journal of
Banking and Finance, April 2008, pp. 472-479.
January 29: Direct investment flows
Required readings:
1) Nauro F. Campos and Yuko Kinoshita, “FDI and Structural Reforms:
Evidence from and Eastern Europe and Latin America,” IMF Working Papers
WP/08/26, January 2008.
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2) Peter J. Buckley and Frances Ruane, “FDI in Ireland: Policy Implications for
Emerging Economies, The World Economy, November 2006, pp. 1611-1628.
3) The Economist, “The Challengers: Emerging Market Multinationals,” January
10, 2008.
4) Torfinn Harding and Beata Javorcik, “Developing Economies and
International Investors: Do Investment Promotion Agencies Bring Them
Together?,” World Bank Policy Research Paper #4339, August 2007.
5) Diana Farrell et al., “The Truth about FDI in Emerging Markets,” The
McKinsey Quarterly, 2004, #1, pp. 25-35.
February 5: Bank and bond finance
Required readings:
1) World Bank, “The Globalization of Corporate Finance in Developing
Countries,” in Global Development Finance 2007 (Washington, DC: World
Bank, 2007), Vol. 1, Chapter 3, pp. 73-102.
2) Juan Carlos Gozzi et al., “Patterns of International Capital Raisings,” draft,
June 2008.
3) World Bank, “The Changing Role of International Banking in Development
Finance,” in Global Development Finance 2008 (Washington, DC: World
Bank, 2008), Vol. 1, Chapter 3, pp. 81-110.
4) Javier Rodríguez and Javier Santiso, “Private Banks in Emerging
Democracies,” in Financing Development 2008: Whose Ownership? (Paris,
OECD, 2008), pp. 85-112.
5) Barry Eichengreen and Pipat Luengnaruemitchai, “Bond Markets as Conduits
for Capital Flows: How Does Asia Compare?,” IMF Working Paper
WP/06/238, October 2006.
February 12: Contagion effects
Required readings:
1) Graciela Kaminsky, Carmen Reinhart and Carlos Vegh, “The Unholy Trinity of
Financial Contagion,” Journal of Economic Perspectives, Fall 2003, pp. 5174.
2) Thomas Moser, “What is International Financial Contagion?,” International
Finance, July 2003, pp. 157-178.
3) G. Andrew Karolyi, “Does International Financial Contagion Really Exist?,”
International Finance, July 2003, pp. 179-199.
4) Tatiana Didier et al., “Vanishing Financial Contagion?,” Journal of Policy
Modeling, September 2008, pp. 775-791.
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February 19: Sudden stops
Required readings:
1) Pablo E. Guidotti, Federico Sturzenegger and Agustín Villar, “On the
Consequences of Sudden Stops,” Economía, Spring 2004, pp. 171-214.
2) Eduardo A. Cavallo and Jeffrey A. Frankel, “Does Openness to Trade Make
Countries More Vulnerable to External Crises, or Less?,” Journal of
International Money and Finance, December 2008, pp. 1430-1452.
3) Andrei Levchenko and Paolo Mauro, “Do Some Forms of Financial Flows
Help Protect from Sudden Stops?,” World Bank Economic Review,
September 2007, pp. 389-411.
4) Kevin Cowan et al., “Financial Diversification, Sudden Stops, and Sudden
Starts,” in Kevin Cowan et al., editors, Current Account and External
Financing (Santiago, Chile: Banco Central de Chile, 2008), pp. 159-194.
February 26: Role of credit rating agencies
Required readings:
1) R. Gaston Gelos et al., “Sovereign Borrowing by Developing Countries: What
Determines Market Access?,” IMF Working Papers WP/04/221, November
2004.
2) Standard & Poor’s, “Sovereign Credit Ratings: A Primer,” May 19, 2008.
3) Eduardo A. Cavallo et al., “Do Credit Rating Agencies Add Value?,” IADB
Research Department Working Paper #647, November 2008.
4) Roman Kräussl, “Do Credit Rating Agencies Add to the Dynamics of
Emerging Market Crises?,” Journal of Financial Stability, April 2005, pp. 355385.
March 5: Mid-term Exam: Multiple-choice questions
March 12: No class meeting: Spring Break
March 19: Role of the IMF
Required readings:
1) Javier Díaz-Cassou et al., “What Kind of Capital Flows Does the IMF
Catalyze and When?,” Banco de España Documentos de Trabajo #617,
2006.
2) Barry Eichengreen et al., “The IMF in a World of Private Capital Markets,”
Journal of Banking and Finance, May 2006, pp. 1335-1357.
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3) Ashoka Mody and Diego Saravia, “From Crisis to IMF-Supported Program:
Does Democracy Impede the Speed Required by Financial Markets?,” IMF
Working Paper WP/08/276, December 2008.
March 26: Mismatches
Required reading:
1) Mark Allen et al., “A Balance Sheet Approach to Financial Crisis,” IMF
Working Papers WP/02/210, December 2002, excerpt, pp.1-23.
2) Morris Goldstein and Philip Turner, Controlling Currency Mismatches in
Emerging Markets (Washington, DC: IIE, 2004), Chapters 1, 2 and 9, pp.1-19
and 113-120.
3) John D. Burger and Francis E. Warnock, “Local Currency Bond Markets,” IMF
Staff Papers, September 2006, pp. 133-146.
4) Serge Jeanneau and Camilo E. Tovar, “Financial Stability Implications of
Local Currency Bond Markets: An Overview of the Risks,” in New Financing
Trends in Latin America: BIS Papers #36, February 2008, pp. 65-87.
April 2: Capital controls
Required readings:
1) Nicolas Magud and Carmen M. Reinhart, “Capital Controls: An Evaluation,” in
Capital Controls and Capital Flows in Emerging Economies, op. cit., pp. 645674.
2) Kristin J. Forbes, “The Microeconomic Evidence on Capital Controls: No Free
Lunch,” in Capital Controls and Capital Flows in Emerging Economies, op.
cit., pp. 171-199.
3) Bernardo S. de M. Carvalho and Márcio G.P. Garcia, “Ineffective Controls on
Capital Inflows under Sophisticated Financial Markets: Brazil in the Nineties,”
in Financial Markets Volatility and Performance in Emerging Markets, ed. by
Sebastian Edwards and Márcio G.P. Garcia (Chicago: Univ. of Chicago
Press, 2008, pp. 29-96.
April 9: Indebtedness and overindebtedness
Required readings:
1) Inter-American Development Bank, Living With Debt (Washington, DC: IADB,
2006), Chapter 3 (“How Does Debt Grow?”), pp. 41-60.
2) Aliona Cebotari, “Contingent Liabilities: Issues and Practice,” IMF Working
Paper WP/08/245, October 2008.
3) Carmen M. Reinhart, Kenneth S. Rogoff and Miguel A. Savastano, “Debt
Intolerance,” Brookings Papers on Economic Activity, Spring 2003, pp. 1-62.
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4) IMF, Global Financial Stability Report September 2007 (Washington, DC:
IMF, 2007), Chapter 3 (“The Quality of Domestic Financial Markets and
Capital Inflows”), pp. 77-109.
April 16: Sovereign defaults
Required reading:
1) Federico Sturzenegger and Jeromin Zettelmeyer, Debt Defaults and Lessons
from a Decade of Crises (Cambridge, MA: MIT Press, 2006), Chapters 1 and
2, pp. 1-43
2) Arturo C. Porzecanski, “From Rogue Creditors to Rogue Debtors: Implications
of Argentina’s Default,” Chicago Journal of International Law, Summer 2005,
pp. 311-332.
3) Arturo C. Porzecanski, “Debt Relief by Private and Official Creditors: The
Record Speaks,” International Finance, Summer 2007, pp. 191-214.
April 23: Final Exam: Multiple-choice questions
April 30: E-mail versions of essay due by 6AM
Choose from among the following three topics for your 2,000-word paper (excluding
footnotes and bibliography), which must demonstrate the application of concepts
learned in class and should include citations to a bibliography of at least five (5)
scholarly, academic or official sources beyond those listed in this syllabus. Citations to
articles or other materials in newspapers, magazines (e.g., The Economist and Foreign
Affairs), NGO websites and blogs, while permitted, do not count toward the minimum.
Please use Word, specify single-line spacing, and send the essay via e-mail to the
professor by the due date and time.
1.
Your boss, the newly appointed Minister of Finance, suggests that since
interest rates are lower in the international capital market relative to those
prevailing in the domestic capital market, now is a great time to borrow
heavily abroad rather than at home. Write him a memorandum explaining
why “not all that shines is gold.”
2.
Your prescient boss, the Economic Advisor to the President, was worried
in 2007 about what could happen to the domestic economy should
international economic conditions deteriorate during 2008-09 – as they
have – damaging the terms of trade, tourism or worker-remittance flows,
and the country’s access to world financial markets. Write her the
memorandum you would have delivered at the start of 2008 detailing what
three (3) near-term reforms should have received top government priority
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during spring-summer 2008 to minimize “contagion effects” and/or the
fallout from a “sudden stop.”
3.
Your boss, the President of the Central Bank, is leaning in favor of
liberalizing the country’s regulatory framework governing capital inflows in
2009, but is unsure whether to favor foreign direct investors versus foreign
portfolio lenders and investors – or whether to put out the welcome mat to
any and all. Write him a memorandum arguing against a discriminatory,
paternalistic approach to capital-account liberalization.
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