The Political Economy of Emerging Markets

The Political Economy of Emerging Markets

The CERI Series in International Relations and Political Economy Series Editors, Christophe Jaffrelot and Christian Lequesne This series consists of works emanating from the foremost French research center in international studies, the Paris-based Centre d Etudes et de Recherches Internationales (CERI), part of Sciences Po and associated with the CNRS (Centre National de la Recherche Scientifique). Founded in 1952, CERI has about sixty fellows drawn from different disciplines who conduct research on comparative political analysis, international relations, regionalism, transnational flows, political sociology, political economy, and on individual states. This series focuses on the transformations of the international arena, in a world where the state, though its sovereignty is questioned, reinvents itself. The series explores the effects on international relations and the world economy of regionalization, globalization (not only of trade and finance), and transnational flows at large. This evolution in world affairs sustains a variety of networks from the ideological to the criminal or terrorist. Besides the geopolitical transformations of the globalized planet, the new political economy of the world has a decided impact on its destiny as well, and this series hopes to uncover what that is. Published by Palgrave Macmillan: Politics in China: Moving Frontiers edited by Françoise Mengin and Jean-Louis Rocca Tropical Forests, International Jungle:The Underside of Global Ecopolitics by Marie-Claude Smouts, translated by Cynthia Schoch The Political Economy of Emerging Markets: Actors, Institutions and Financial Crises in Latin America by Javier Santiso

The Political Economy of Emerging Markets Actors, Institutions and Financial Crises in Latin America Javier Santiso

THE POLITICAL ECONOMY OF EMERGING MARKETS Javier Santiso, 2003 Softcover reprint of the hardcover 1st edition 2003 978-1-4039-6232-4 All rights reserved. No part of this book may be used or reproduced in any manner whatsoever without written permission except in the case of brief quotations embodied in critical articles or reviews. First published 2003 by PALGRAVE MACMILLAN 175 Fifth Avenue, New York, N.Y. 10010 and Houndmills, Basingstoke, Hampshire, England RG21 6XS. Companies and representatives throughout the world PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin s Press, LLC and of Palgrave Macmillan Ltd. Macmillan is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN 978-1-4039-6903-3 ISBN 978-1-4039-7378-8 (ebook) DOI 10.1057/9781403973788 Library of Congress Cataloging-in-Publication Data Santiso, Javier. The political economy of emerging markets: actors, institutions and financial crises in Latin America/by Javier Santiso. p. cm. Includes bibliographical references. 1. Capital market Latin America. 2. Stock exchanges Latin America. 3. Financial crises Latin America. I. Title. HG5160.5.A3S26 2003 332.098 dc21 2002044716 A catalogue record for this book is available from the British Library. Design by Newgen Imaging Systems (P) Ltd., Chennai, India. First edition: August, 2003 10 9 8 7 6 5 4 3 2 1

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CONTENTS List of Tables, Charts and Graphs The Author viii xi Chapter One Chapter Two Chapter Three Chapter Four Chapter Five Chapter Six Chapter Seven Introduction: Inside the Black Box. A Journey Toward Emerging Markets 1 The Confidence Game: Exit,Voice and Loyalty in Financial Markets 17 Capital Flows to Emerging Markets: Goodbye the Golden 1990s? 46 The Usual Suspects:Timescales, Strategies and Constraints of Emerging Market Asset Managers 71 A Small Embedded World:Technopols, Arenas and Trespassers 113 The Timing Game:Wall Street, Mexico and Argentina. A Temporal Analysis 146 Conclusion: Financial Markets and the Memory of the Future 187 Notes 204 Index 251

LIST OF TABLES, GRAPHS CHARTS AND Tables 2.1 Timetable of pension reforms around the world 30 2.2 Argentina s political speed: ministerial changes between 1983 and 2001 40 3.1 Frequency of crises in emerging markets 1880 1997 49 3.2 European investments in emerging countries before World War I 50 4.1 Effects in terms of fund flows of free float adjustments (% weight change) 81 4.2 Emerging market equity funds in 2000 85 4.3 Latin American emerging market equity funds, July 2000 87 4.4 Global emerging market equity funds, sample of interviews, July 2000 90 4.5 Herfindahl Hirschman concentration index of emerging market equity funds: money managers ranked by total net assets, July 2000 94 4.6 100 largest emerging market equity funds concentration index, July 2000 97 4.7 Emerging market equity funds ranked by assets and websites, July 2000 101 4.8 Frequency of the evaluation of fund managers performance 105 4.9 Fund managerial replacement, 1976 1996 106 4.10 Salaries and bonuses in fund management and investment banks, London (in pounds per 1000) 108 4.11 Salaries and bonuses in the United States 109

LIST OF TABLES,CHARTS AND GRAPHS 4.12 Timing of bonus negotiation and payment (in % of total sample: 145) 112 5.1 Top and medium economic policy-making positions in Mexico, October 1994 115 5.2 World confidence game arenas, annual meetings in 2000 123 5.3 JP Morgan Chase program speakers during the IADB 2001 annual meetings, Santiago de Chile, March 17 20, 2001 126 5.4 (a) Speakers at the IADB 2001 investor forums, number of speakers by country 127 (b) Speakers at the IADB 2001 investor forums, number of speakers by profession 127 5.5 The Financial Times confidence game arena 134 5.6 The trespassing game: the example of New York-based Deutsche Bank securities 138 5.7 A circular game: analysts views in Latin American national investment agency reports 141 6.1 IMF global standard efforts since Mexico: an empirical evaluation by fund managers (n 61) 170 6.2 Mexico investment grade: falling correlations between Mexico and other Latin American emerging markets (%) 173 7.1 The power game: distribution of voting rights in the IMF by groups of countries 202 ix Charts 2.1 Change of governors and terms of office 33 2.2 IMF facilities: shortening temporal horizons of the confidence game 41 Graphs 2.1 Latin American 1988 1997 privatization revenues/ 1997 GDP (%) 28 2.2 Diffusion of pension reforms around the world, 1980 2000 29 2.3 Number of central banks, 1900 2000 33 3.1 Crisis frequency in emerging markets (percent probability per year) 48 3.2 Foreign direct investments in Latin America, 1900 2000 (in % of GDP) 51 3.3 Net capital flows to emerging markets by region (US$ bn.) 53

x List of Tables, Charts and Graphs 3.4 Net capital flows to Latin American countries (US$ bn.) 54 3.5 The slowdown of bank leading: a blessing in disguise? 55 3.6 Templeton Global Performance Index 2000 56 3.7 Global emerging markets capitalizations in 2000 60 3.8 The slow death of an emerging stock market? 61 3.9 Impact of investors portfolio reallocation on Latin American stock markets 64 3.10 Global equity emerging market holdings, 1999 and 2000 65 3.11 Euro share growth in Latin American bond issues (in % of total issues by type) 68 3.12 Growth of euro-denominated bond issues in Latin America 69 4.1 The index game in 2001: MSCI emerging market rebalancings 81 4.2 Top 15 fund assets ranked by country of registration, July 2000 (in US$ mios) 86 5.1 International newspaper preferences (% of references out of a sample of 14 interviews) 129 5.2 Ranking of international newspapers based on reliability and usefulness as sources of information (in %; size of the sample: N 145) 130 5.3 Brokers versus fund managers reliance on international newspapers (in % N 145) 131 5.4 The Financial Times as a confidence game arena: number of references between 1995 and 2000 133 6.1 The synchronized economies: Mexico and the United States during the 1990s 170 6.2 Major perceived country risks in Latin America by mid-2000: respondents referencing the country risk as a major concern over the next 12 months (66 responses) 181 6.3 Top number one risks in Latin America; Q2 2000 (nominal responses and %; 66 interviews) 182 6.4 Argentina: expected currency change over the next 12 months by (mid-2000) (%, on a total of 50 expressed opinions, Q2 2000) 183 6.5 The currency game: the timing and political economy of exchange rates in Latin America (nominal exchange rate depreciation around elections (presidential parliamentary) 242 episodes) 185

THE AUTHOR Javier Santiso holds B.A., M.A. and Ph.D. degrees from Sciences Po Paris (Institut d Etudes Politiques de Paris) and an M.B.A. degree from HEC School of Management. From 1995 to 1997 he completed his doctoral studies at Oxford University as a Senior Associate Member of the St. Antony s College Latin American Center (University of Oxford). From 1997 to 2002 he was tenure-track Research Fellow at the Paris-based think-tank Centre d Etudes et de Recherches Internationales (CERI-Sciences Po Paris) and as a Senior Expert Associate on Latin American Emerging Markets for Crédit Agricole Indosuez investment bank. He also served as a consultant for leading private institutions (Société Générale, Dexia, Générale des Eaux,Total Fina Elf, Renault), international organizations (Inter-American Development Bank, OECD) and nongovernmental organizations (International Federation of Human Rights). Since 2002, he is the Madrid-based Chief Economist for Latin America of Banco Bilbao Vizcaya Argentaria (BBVA). This book is based on an academic research conducted before 2002 and does not engage the responsibility of any of the mentioned institutions. He has been Visiting Professor in Latin American Political Economy at The Paul Nitze School of Advanced Studies, SAIS Johns Hopkins University. He also lectured on international political economy at Sciences Po Paris and on European corporate strategies in Latin America at HEC School of Management. He has published several articles (more than 30) in leading academic journals in France, United States, United Kingdom, Chile, Spain and Mexico.