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Issue Introduction: International Financial Crises: What Role for Goverment?
By James A. Dorn
Introduction
The impoverishment caused by broken promises on the part of governments that fail to protect private property rights, enforce contracts, and limit taxing and spending to prudent levels is evident in the increased frequency of financial crises in emerging market economies. Argentina's stunning default in December 2001 and the Brazilian crisis in 2002 are only the latest examples of how bad government policies undermine confidence and destroy wealth.
After the Argentine government defaulted on its debt, reneged on its promise to convert pesos into dollars on demand, devalued its currency, denied free access to bank deposits, and, most recently, imposed capital controls, what investor could possibly have confidence in the future of that country—or in Brazil—without fundamental political and economic reform?
The International Monetary Fund's refusal to bail out Argentina was an admission that a new course was needed to deal with sovereign debt crises, which are closely linked with currency and banking crises. To contain and prevent such crises requires that governments pursue transparent pro-market policies that cannot easily be reversed. There must be a long-term commitment to free trade, the rule of law, and sound money; otherwise global investors will take their capital elsewhere. By failing to honor its debts and to maintain the value of its currency, the Argentine government destroyed the confidence it had established and increased the costs of attracting future investment funds.
Although the IMF has poured billions of dollars into emerging market countries since the 1994-95 Mexican peso crisis, the credibility problem remains—namely, how to create an institutional framework in which governments "do no harm," so that markets can increase economic growth and stability. That issue and the question of whether IMF intervention can improve on potential market solutions to sovereign debt crises were the focus of the Cato Institute's 20th Annual Monetary Conference—"International Financial Crises: What Role for Government?"—cosponsored with The Economist, October 17, 2002, in cooperation with the Donald and Paula Smith Family Foundation.
The articles in this issue of the Cato Journal were all first presented at the 2002 monetary conference. Those that relate directly to sovereign debt, especially the question of alternative approaches to restructuring unsustainable debt of emerging market countries, are summarized in this introduction.
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