BLOG #8

BLOG #8

“More importantly, the opening of the economy to capital movements makes it more vulnerable to problems of moral hazard, corruption, and the lack of transparency in business-government relations. When growth is high, foreign investors are perfectly willing to tolerate (and even to contribute to) these problems. But when growth slows, the nontransparent nature of business-government relations can generate substantial uncertainties… This brings me to the final, and perhaps most important, point. Not all of the region’s problems stemmed from rent-seeking as traditionally conceived; a final source of risk was the mismanagement of liberalization, particularly in the financial sector. The dangers of opening the capital account while maintaining a fixed exchange rate have attracted most scrutiny in accounts of the crisis, but the failure of prudential regulation of the banking system was an equally important problem.” (Haggard, pp. 138).

This quote makes reference to the possible causations that led to the Financial crisis that affected Asia in 1998. Particularly in this selection, Haggard focuses on businesses-government relationship and the positive and negative connotations that such relationship has and how some of them had given way to an economic slope in the region. Haggard makes mention of the substantial scrutiny that is raised once economic prosperity doesn’t not favored neither the people or the business, in other words he explains that once that positive feedback is not present, the relationship and the perception of the people upon that relationship grows increasingly worry because it’s hard to draw the line between the interests of the private sector and the democratic process.

As mentioned in the lecture, a financial crisis happens when “income cannot keep pace with debt” and as the example of Argentina in which the IMF didn’t not provide a loan or the case presented by Haggard of Kia Motors and the effects of the crisis in Korea due primarily by bad management of economic policy, both scenarios expose the risks of global political economy in which each actor plays an important role but further it demonstrates the influence of financial institutions and their impact at regional and international levels. This closely associates with the financial crisis in Asia and the idea exposed by Haggard in this quote because banking systems had a predominant influence on the liberalization of economic policy which led to a turbulent regulatory process between government and the private sector, leading to corruption and the greater crisis. As he states, the crisis stemmed not only from bad policy decisions but also from deep political problems closely associated with corporations and the private sector.

The problems of a global “organized” interconnected economy is that the economic and political decisions of one particular region end up hurting or affecting another region or country. As in the case of the Asian financial crisis which greatly affected Argentina in 1997-8, the 2008 financial crisis in the United States send shock waves around the globe with Europe and Asia being greatly affected. This concept accentuates a consistent danger within neoliberal practice and that is that globalization can affect a country’s political and economic arena regardless of domestic measures, subsequently creating greater risks and uncertainty. As Haggard mentions in the quote such capital mobility and dependency makes the whole system more vulnerable.