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Global Financial Crises 1

Running head: GLOBAL FINANCIAL CRISES

The Role of The International Monetary Fund In 1997 Global Financial Crises

Asam Mustafa
15127 NE 24th St. #235
Redmond WA 98052
Asam004@qwest.net

Washington State University

Business school, the Center For Entrepreneurial Studies

Pullman, WA

April 29th 2005


Global Financial Crises 2

ABSTARCT

This study is conducted through Washington State University business school, the

economic department (ECON-418). For WSU business students to integrate and apply theory

and principles learned in business education i.e. macroeconomic. This report effort presents a

discussion of the movements of portfolio capital in Mexico, Argentina and Thailand since 1989.

Additionally the report will examine the comparisons with what happened in the rest of East Asia

and Latin America by examining the contagion affect. And by making an assessment for the

factors affecting the demands by countries and region above for portfolio funds and the factors

influencing the supplies of these funds. Moreover, the report will analyze the relationships

between the balance on current account, the budget deficit and the exchange rate, as well as the

relationship between the exchange rate and interest rates with the inflows of portfolio capital in

these countries.

The Outline for Field Project Report

• The responding to the challenge, and the policies promoted by the (International

Monetary Fund (IMF) and World Bank that was introduced to Mexico, Argentina and

Thailand, all these countries seek efficient market-based systems that provide improved

social welfare and integration with the world economy. To achieve this, these countries

have adopted measures that are now the standard for economic reform regimes

worldwide, i.e. privatization, agriculture reforms, and the lowering of domestic barriers to

trade and foreign investment.

• The nature of the Asian financial crisis and the underlining causes of their global nature.

By examining was the Asian crisis in Thailand a result of an overvalued exchange rate,
Global Financial Crises 3

excessive government borrowing, or too much consumption of import. Moreover, the

report will examine what precipitated the crisis in Mexico and Argentina.

• Mexican crisis in 1994 and Thailand financial crisis in 1997 to see if there is evidence of

such moral hazard. In addition, the paper will we will examine the concept of moral

hazard. Moral hazard can be present any time two parties come into agreement with one

another. Each party in a contract may have the opportunity to gain from acting contrary to

the principles laid out by the agreement. The risk that a party to a transaction has not

entered into the contract in good faith, has provided misleading information about its

assets, liabilities or credit capacity, or has an incentive to take unusual risks in a desperate

attempt to earn a profit before the contract settles.

• Discussion of the contagion effect, the concept that, under globalization, for example, a

financial crisis in one country may affect those around it. The report will examine the

contagion affect of these countries and region. For example, what participate Mexico

peso crisis in Latin America, and what affect the Thailand’s Bhatt had on East Asia

financial crisis.

• Discussion of the trends in Mexico before and after the Peso Crisis and after the

formation of NAFTA in relation to the trends that were implemented under the

MAQUILA, MAQUILADORA and NAFTA programs.

• The report will also explore the exchange rate, direct investment, portfolio equity, tariffs

on imports, and other trade measures in these countries and regions.

• Discussion and assessment of the impact of globalization on the flow of labor within

Mexico and the affect of Maquiladora and Maquila programs. And assess the impact of

globalization on labor movement and Mexico’s standard of living. The report will
Global Financial Crises 4

examine the processes by which globalization impacts an individual country's movement

of labor and standard of living based on my consideration and perspectives on

globalization and finally an assessment on the implications, and consequences of

globalization.

• Additionally, the pepper will analyze the effect of the international movements of labor

and the issue of remittances e.g. Sudan,. The report will examine the impact of portfolio

and direct foreign investment in contrast to the IMF objectives that reflect the importance

attached to the two type of capital flows, achieved by examining the success of IMF

lending policies in these countries, and what measures applied by the IMF to promote

these capital flows through conditionality in their lending policies? Additionally, the

report will examine the Globalization and Capital Flows discussed and some effects of

globalization, such as contagion, moral hazard, and the impact of direct foreign

investment on the host country.

Asam Mustafa

Washington State University

Pullman, Washington

April 29th 2005


Global Financial Crises 5

CONTENTS
1. Portfolio Capital……………………………………………………………………….6
Mexico………………………………………….………………………………...6
Argentina…………………………………….…………………………………..14
Thailand………………………………………………………………………….19
2. The Impact of Economic Reforms…………………………………………………….27
Mexico………………………………………………………………………...…27
Argentina………………………………………………………………………...33
Thailand…………………………………………………….……………………38
3. Global Financial Crisis………………………………………………………………..41
Asia Financial Crisis……………..……………………………………………....41
Factors Affected Asian Financial Crises…………………………………………44
Thailand………………………………………………………………………….43
South America Crisis-Mexico…..…………………………………………….…43
4. Contagion Effect……………………………………………………………………....49
Mexico…………………………………………………………………………...50
Thailand………………………………………………………………………….52
5. Moral Hazard……………………………………………………………………….…57
Mexico…………………………………………………………………………...57
Thailand………………………………………………………………………….60
6. Direct Foreign Investment……………………………………………………….……62
NAFTA…………………………………………………………………………..62
Maquiladora……………………………………………………………………...64
Maquila………………………………………………………………………….64
Mexico…………………………………………………………………………...65
7. Production and Labor……………………………………………………………..…..69
International Movement of labor & Issue of Remittances………………………70
Industrial Development and Employment……………………………………....73
Flow of Labor within Mexico…………………………………………………...74
The impact of Maquiladora Program's…………………………………………..79
8. International Monetary Fund…………………………………………………………82
IMF-Bailouts……………………………………….…………….……………...82
Globalization and Capital Flows…………………………………………………84
Globalization & Economy………………………………………………….……85
Globalization & Politics………………………………………………………....89
9. Conclusion…………………………………………………………………………….92
References………………………………………………………………………………116
Global Financial Crises 6

1. Portfolio Capital

In this section the paper will examine, compare, and contrast the movements of

portfolio capital in Mexico, Argentina and Thailand since 1989; in addition, the paper

will exam what happened in the rest of East Asia and Latin America by testing the

contingent affect, this achieved by making an assessment for the factors affected demands

by for these countries portfolio funds and the factors influenced supplies of these funds in

host country and/or regional.

In addition, analyzing the relationships between the balance on current account, the

budget deficit and the exchange rate, as well as the relationship between the exchange

rate and interest rates in contrast to the inflows of portfolio capital for both region and

countries. Current account deficit was well articulated by Lawrence Summer US Deputy

Treasury Secretary, on the anniversary of the Mexican financial crisis, wrote in the

Economist “close attention should be paid to any current account deficit in excess of 5%

of GDP, particularly if it is financed in a way that could lead to rapid reversal” (Corestti,

& Pesenti, & Roubini, 1998).

Mexico

First, the financial crisis in Mexico, the domestic productive capacity has had

collapsed in 1994. Between 1995 and 1997, more than a third of Mexico's businesses and

over 20,000 small and medium-sized enterprises declared bankruptcy. With domestic

demand still low, interest rates still high and barriers to imports falling. Since the collapse

of the economy, the government has invested the equivalent of more than US$46 billion

in the banking system, an amount equivalent to 12 percent of the country's GDP and

twice the amount spent by the government on education and social development
Global Financial Crises 7

combined. More than 50 percent of the banks' portfolios are overdue, as most businesses

and consumers cannot repay their loans. The Mexican episode, the deterioration of the

current account in years preceding the 1994 crisis was largely due to a fall in private

savings and boom in private consumption (Corsetti, et al, 1998).

(EIU, 2008)

Mexico’s relevant data examination will be based on many factors that start with the

balance current account for Mexico according to the data (file 2.2) the deficit of the

Current account for Mexico form 1989 until 1994 was $102,196 millions, and from 1995

up until 2003 the current account deficit was $227,042 millions. Thus, the current

account deficit created huge demands for the US dollars since 1988-89 and this problem

existed before the actual Mexican crisis took place.


Global Financial Crises 8

(EIU, 2008)

Year Deficit
1989-1994 $102,196 Millions
1995-2003 $227,042 Millions
By comparing Mexico current account balance (deficit) with Latin America current

account balance, according to the data in 1989 the current account deficit for Latin

America was $8586 millions, which means the demands for US dollar for the whole

region was huge. And Latin America current account stayed deficit up until 1997, which

was $65214 millions.

Current Account Balance

10000
0
-10000
80

81

82

83

84

85

86

87

88

89

90

91

92

93

94
19

19
19

19

19

19

19

19

19

19

19

19

19

19

19
-20000 Latin America
-30000 Mexico

-40000
-50000
-60000
Year

This illustrates the analogues relation between Latin economy as in general and Mexico

as country; both had current account surpluses in 1984 and have similar market behavior

for the rest of the years 1989-1997. Therefore, interest payments on heavy foreign

borrowing have exacerbated the current account deficit. In order to pay back the U.S.

Treasury its bailout loan, the Mexican government borrowed extensively in international

private markets. It offered rates of five percent above what is normal, taking on extensive

obligations. Today, a large percentage of Mexico's reserves are borrowed monies, an

extremely precarious situation, even by IMF standards (p. 18).


Global Financial Crises 9

Furthermore, measure of the adequacy of foreign exchange reserves will be illustrated by

the ratio of money assets to foreign reserves. This well demonstrated by the Mexico’s

reserves in 1989 was $6,740 millions, which will not cover the current account deficit

($3,958 plus and short-term loans both total $12,620 millions. The reserves in 1993 the

reserves was $25,299 millions and the current account deficit was $23,400 millions, and

the short-term loans were $36,257 millions. By adding short-term loans to the deficit, the

deficit will equal $59,657 millions; this indicates the country financial crisis started well

before 1989.

(EIU, 2008)

Consequently, this led to financial crisis and currency devaluation to cover the deficit

gap, in addition to other major economic reforms that was induced by IMF. Hence, this

means that reserves did not cover short-term loans and this could be one of the reasons of

Mexico financial crisis. Therefore, the change and the deficit in the current account and

in the reserves paved the way for Mexico financial crisis in 1994. Hence, The financial

crisis will continue if current account and reserves and short-term loans are not in

equilibrium. Because of the existence of large foreign reserves facilitates the financing of

a current account deficit, and enhance the credibility of a fixed exchange (p. 35).
Global Financial Crises 10

The affect of Mexican currency devaluation could also be examined by the exchange rate

for Mexico, in 1985 the currency was devaluated form U$/371.7 pesos and devaluated to

U$/ 0.92 in 1986, in the same time in the black market premium was 6.12% in 1989 the

Mexico's Exchange Rate

400
350
300
250
200 Mexico (Peso/1$)
150
100
50
0
71

73

75

77

79

81

83

85

87

89

91

93
19

19
19

19

19

19

19

19

19

19

19

19
Year

currency exchange rate equal to 2.64 Peso/U$ in the black market was % 11.13.

Moreover, the devaluation increased in 1993 to [U$/3.105 peso] and in the black market

premium was 1.80%, in 1994 the exchange rate was [U$/ 5.35] and finally in 2001 [U$/

9.14]. Hence, this indicate that the economy in turmoil and might not attract portfolio

equities to Mexico because Mexican currency had been devaluated in 1986, this would

indicates financial trouble and possible inflation. Therefore, the portfolio equity

according to the chart started to aim at Mexico in 1990, which was $563 millions and was

growing exponentially in 1993 was $14,297 millions and dropped in 1994 to $4,521

millions and deficit in 1998 $665 and finally deficit in 2002 $104 million.

The Mexican Treasury bill interest rate for the same period were in [1988 -103.7%], in

[1990 44.99%], [1994 14.99%], and in [1996 48.44%]. This indicates that Mexico was

using concretionary monetary policy (raise interest rates and lower income); and possibly
Global Financial Crises 11

attracted equity portfolio. The real interest rate was nil before 1993. In [1993-11.2%],

[1994-11.4%] and [1996-4.7%] it looks after 1994 that Mexico was applying

expansionary monetary policy (reduce interest rates and raise income).

(EIU, 2008)

Moreover, the Mexican GNP, which is an aggregate final output of citizens and business

of an economy in one-year. Mexico GNP in [1989-$198194 billions] and was growing

exponentially up to [1994-$407,764 billions] and in 1995 dropped to $272,877 billions.

The regional GNP for Latin America for the same period was, in [1989-$106,4676] in

1994 was zero. This indicates that Mexico aggregate final output was growing

exponentially up until 1994 and after the financial crisis it dropped in 1995 to as low as

$272,877 billions. Hence, possibly what had happened may be linked to unwise

economic decisions, or the whole Latin America region was in economic stress.

Furthermore, the GDP is an indicator of the total market value of all final goods

and services produced in an economy in a year. Thus, the Mexican GDP growth rate for
Global Financial Crises 12

the same period was [1989-1.3%], [1991-4.2%], [1993-2%], [1994-4.5%], [1995 -

(-6.2%)], in [1996-5.1%] and finally in 2003 1.5%. Since the GDP in 1993 was 2% and

the world average was 3.3% indicating that financial crisis on the horizon and Mexico

and slow growth might also contributes to the reasoning of crisis on the horizon.

(EIU, 2008)

GDP Grow th Rates

10

2
Latin America
M exico
0

-2

-4

-6

-8
Y ear
Global Financial Crises 13

Reference to Mexico capital inflow, the Mexican interest rate was fluctuating and

this might encouraged investor’s because of high Treasury bill interest rate as high as

103.7% in 1988 and between [14%-69%] in the period [1989 –1995]. The real interest

rate for the same period was in [1993-11.2%], [1994-11.4%], and in [1995 was 15%]. In

addition, according to the data portfolio equity in Mexico started in [1990-$563 millions]

and eventually increased in [1992 -$5,365 millions], in [1993-$14,297 millions], in

[1994- $4521millions], and decreased in [1995-$520 millions] and eventually increased

in [1996- $3,922 millions] and in [1999-$1,129 millions].

(EIU, 2008)
Global Financial Crises 14

(EIU, 2008)

This indicates that investors were attracted to invest in Mexico up to 1993

possibly because of the high interest rate. Thus, the financial crisis of 1994 affected the

capital inflows. Eventually the portfolio capital inflows are gaining momentum in

Mexico; it increased from [$520 millions-1995] to [$1,129 millions] in 1999. This

indicates that Mexico is gaining investors and foreign capital trust back and the financial

situation possibly was improving. Therefore, this illustrates that economy is correlated

and intertwined together in investment network globally and regionally, thus, values and

economic risk are calculated according to the status quo of the host country, region, and

global.

Foreign Direct Investm ent

14000

12000

10000

8000
Mexico
6000

4000

2000

Year

Argentina

In Argentina the deficit on the current account in [1989-$1,305 millions], and the

short-term loans were [1989-8,525 millions] and the reserves for the same year [$3,217

millions]; hence, the reserves will not cover short-term loans and the deficit on the

current account. In 1991 the deficit was [$ 2,862 millions] and the short-tern loans were

[$13,546] and in reserves were [$7,463 millions], again the reserve is not sufficient. In

1993 the current account deficit [$6,557 millions] and the short-term loans were [$9,419
Global Financial Crises 15

millions] and the reserves were [$15,499 millions]. In 1994 the deficit was [$11,158

millions] and the short-term loans were [$7,171 millions]. In 1995 the deficit was [$5,210

millions] and the short-term loans were [$21,335 millions] and the reserves were

[$15,979 millions].

(EIU, 2008)

These measures indicate that Argentina was not in economic equilibrium, because for

these periods the reserves were not able to cover the trade deficit, and this signal financial

crisis, and will lead to Argentina inability to pay short-term debit, which will contribute

to the financial instability and make investors panic and possibly withdraw their

investment and consequently will create havoc and financial crisis.

Argentina’s Portfolio equity in the same period, in [1989-$8 billions], in [1990-$13

billions], in [1992-$392 millions], [1993-$5,529 millions], in [1994-$1,205 millions] and

in [1995-$211 millions], this led to negative portfolio equity from [1998-2002]. This

indicates that foreign capitals hesitant to invest in Argentina with these variables i.e. trade

deficit and negative reserves.


Global Financial Crises 16

(EIU, 2008)

Moreover, Argentina GNP for the same period were, [1989-$70,220 billions], [1990-

$135,150 billions], [1993-$251,660 billions], [1994-$254,012 billions], in [1995-

$253,636 billions] and [2002-$95,584 billions]. Hence, Argentina’s GNP varies, but was

healthy in [1994-$254,012 billions] and then deteriorated in the following years up to

[2002-$95,584 billions] this indicate financial institutions were trouble and inflation

might be the consequences, which will lower the aggregate output.

Argentina's Exchange Rate

2.5

1.5 Argentina

0.5

Y ear

Argentina’s currency had been devaluated in 1988 from [U$/2.33] to [U$/. 1795] in 1989

and the black market premium was 103.34% for the same year. And in 1990 was [U$/.
Global Financial Crises 17

558] and black market premium was [1990-31.96%], in [1994-U$/. 995] and black

market premium was (0), in [2002-U$/3.32] and black-market premium (0), and in

[2003-U$/2.95]. Thus, this indicates a high inflation in Argentina economy. Argentina’s

Treasury bill interest rate for the same period were, [1996-8%], [1997-6.39%], and in

[2001-12.76%]. The real interest rates were, in [1994-7%], [1995-14.2%], and in [1999-

13.3%]. These fluctuations illustrate that Argentina was using expansionary policy to

attract foreign investors, to salvage its economy. Even tough the reserves were minimal

because the existence of large foreign reserves facilitates the financing of a current

account deficit, and enhance the credibility of a fixed exchange (p. 35).

(EIU, 2008)

Argentina’s portfolio equities in [1989-0], [1990-$13 millions] and grew in [1993- $5,529

millions], in [1997-$1,391 millions], and was negative from [1998 -$-210 millions], up to

[2002-$-81 millions]. As portfolio equity increases the foreign direct investment

increases for example, in 1998 foreign investment was [$6,670 millions] contrasting it

with [1989-$-210 millions] portfolio equity. The portfolio equity has decreased
Global Financial Crises 18

tremendously. This indicates that Argentina is gaining investors trust and the financial

situation was improving.

Current Account Balance

4000

2000
0

-2000
-4000

-6000 Argentina

-8000
-10000

-12000
-14000

-16000

Year

(EIU, 2008)

(EIU, 2008)
Global Financial Crises 19

Tahiland

The Asian crisis of 1997; Thailand was borrowing form abroad to finance

domestic investment. Investment rates and capital inflows in Asia remained high even

after the negative signals sent by the indicators of profitability. This occurred for many

reasons, first, of Japan interest rate fall, lowered the cost of capital for firms and thus,

motivated large financial flows into the Asian countries. Asian financial and banking

sectors, lacks supervision and has weak regulations, low capital adequacy ratios, lack of

incentive-compatible deposit insurance schemes, insufficient expertise in the regulatory

institutions, distorted incentives for project selection and monitoring, outright lending

practices, and non-market criteria of credit allocation. Coressetti, et al (1998) indicated

that “ The competitive pressures were enhanced by increasing weight of China’s total

export in the region, the expectation of a monetary contraction in the US in the summer

of 1997 may have also played a role in participating the crisis.”

(EIU, 2008)
Global Financial Crises 20

(EIU, 2008)

By examining Thai relevant 2.2 data, the deficit on the current account for

Thailand according to the data in [1989-$2,489 millions] and the short-term loans were

[1989-$6,112 millions] and the reserves were [1989-$10,508 millions]. The deficit was

[1990-$7281 millions] and the short-term loans were [1990-$8,322 millions] and the

reserves [1990-$14,258 millions], which is not enough to cover short-term loans because

of the deficit in the current account, this signal financial uncertainty. And in 1994 the

deficit [1994-$8,085 millions] and the short-term loans were [1994-$29,179 millions] and

the reserves were [1994-$30,280 millions], this also negative signs and the financial

stress continues. The deficit was [1996-$14,691 millions] and the short-term loans were

[1996-$37,613 millions] and the reserves were [1996-$38,645 millions], the gap is

getting bigger now, because the deficit is equal [1996-$13,659 millions]. The deficit was

1997-$3021 millions] and the short-term loans were [1997-$39,836 millions] and the

reserves were [1997-$26,897 millions], again the unbalance trade or trade deficit

continues.
Global Financial Crises 21

Current Account Balance

20000
10000
0
-10000
82

84

86

88

92

94

96
80

90
East Asia & Pacific
19

19

19

19

19
19

19

19

19
-20000
Thailand
-30000
-40000
-50000
-60000
Year

Hence, this indicates the demand for US dollar increasing, which was illustrated

by Thailand was trying to narrow the deficit on the trade account by devaluating the Thai

currency. In contrast to S.E Asia regional market in the same period according to data in

the deficit on the current account was [1989-$5,544 millions]. And in [1990-$5,282

millions], [1994-$17,122 million], in [1995-$39,681 millions] and in [1997-$7568

millions]; thus, indicates that Thailand and the S.E Asia share analogues economic

behavior, but the current account for region in 1997 was surplus (China and Singapore

economies) and in Thailand was deficit (financial institutions corruption).

(EIU, 2008)
Global Financial Crises 22

Moreover, by examining the exchange rate for Thailand for the same period; in

1989 the Thai Baht [25.69/1$] and the black market premium was [5.10%], in [1990

U$/25.69] and the black market premium [1.62%] and in 1994 was [U$/28.09] and the

black market premium was (0) and in [1997-U$/47.24] and the black market premium

was [3.08%], in [1998-U$/36.69] and the black market premium (0) and finally in [2000-

U$/44.22]. This indicates that the currency had been devaluated many times in few years

and the black market premium in [1997-3.08%] which cause inflation in the economy.

Thus, this inflation caused by the economic uncertainty and economic crisis in Thailand.

The Thai Treasury bill interest rate for the same period were in [1989-7.5%], [1990-

8.09%], [1996-%10.75], [1997-10.75%] and finally in [2003-3.76%]. The Thai real

interest rate were in [1989-5.8%] and in [1990-8.2%], [1994-5.4%], [1997-8.9%], and

finally in [1999-12.2%], hence, this demonstrate that Thai government and Thai financial

institutions attracting foreign capital into the country because the interest rate is attracting

in both Treasury bill and real interest rate.

(EIU, 2008)
Global Financial Crises 23

Thailand Baht/1$

50
40
30

20

10
0
73

77

79

81

83

85

89

93

97

99

01
71

75

87

91

95
19

19

19

19

19

19

19

20
19

19

19

19

19

19

19

19
Thailand Baht/1$

Thai portfolio equity for the same period was in [1989-$1,426 millions], foreign

investment were [1989-$1,176-millions] and in [1990-$449 millions] and foreign

investment were [1993-$2,444 millions], [1993-$3,117 millions] and foreign investment

[1993-$1,804 millions] in [1994 -$-538 millions] in [1994-$1,336 millions] and in [1996

-$1,551 millions] in [1997-$ 2,336 millions] and in [1997 negative $-308 millions] in

[1997-$3,895 millions] and, in [1998-$289 millions] and the foreign investment [1997-

$7,315 millions]. This indicates that foreign investments still hoping for the Thai

economy to pick-up or possibly theses foreign investment are in the real estate and were

bought during the economy boom and now their value had been devaluated.
Global Financial Crises 24

(EIU, 2008)

Furthermore, Thailand GNP for the same period was according to the data in [1989-

$71,329 billions], [1990-$84573 billions], in [1993-$121,955 billions], in [1997-

$147,203 billions]. The regional GNP for the same period, on [1989-890544 billions] in

[1990- $895,916 billions], in [1994-$1,444,044 billions], in [1997-$1,975,412 billions],

and in [1998-$1,649,207 billions] This signals that economy was growing, but the

Thailand’s trade deficit and short-term loans, in addition to the regional and global

economy may have had effected Thailand financial crisis.

The Thai GDP growth rate for the same period were in [1989-13.3%], [1990-2.2%],

[1994-9%], [1996-5.9%], [1997 – negative 1.4%] and finally on [2003-6.8%]. This

indicates that Thailand financial instability has had effected the gross domestic product,

possibly because the financial institutions failure in Thailand during that period. Thailand

debit-to-GDP ratio [33%] of GDP on 1990, [13% until 1994], and [1996-100%-123%] By

contrast in Korea the ratio [54%-85%] for the same period, and in Indonesia was [177%-

294%], in Malaysia was [41%-69%] in the Philippines was [79%-137%] and in China

was [24%-39% for the same period. This may demonstrate the presents of liquidity crisis

in the SE Asia region (p. 32).

(EIU, 2008)
Global Financial Crises 25

(EIU, 2008)

(EIU, 2008)

(EIU, 2008)
Global Financial Crises 26

(EIU, 2008)

By the end of 1996, a share of short-term liabilities in total liabilities above 50%

was the norm in the region. Moreover, the ratio of short-term external liabilities to

foreign reserves was above 100% in Korea, Indonesia and Thailand, which indicated that

financial fragility in the region. The current account imbalances in the Asian crisis;

according to the data several Asian countries whose currency collapsed in 1997 has

experienced somewhat sizable current account deficit for example, Thailand trade deficit

[1980-$2,076 millions] through [1997-$3,021 millions]. Based on the data the current

account in Thailand was over 6% of GDP in 1995 and 1996 respectively. According to

the data Asian countries in 1990, GDP growth rates were remarkably high in that period.

Growth rate averaging more than 7% of GDP (sometimes closer to 10%) were norm in

the region (p. 15).


Global Financial Crises 27

2. The Impact of IMF Economic Reforms

Responding to the challenge, and the policies promoted by the International

Monetary Fund (IMF) and World Bank that was introduced to Mexico, Argentina and

Thailand, all these countries seek efficient market-based systems that provide improved

social welfare and integration with the world economy. To achieve this, these countries

have adopted measures that are now the standard for economic reform regimes

worldwide, i.e. privatization, agriculture reforms, and the lowering of domestic barriers to

trade and foreign investment. However, culture is unique and nations with different

history and culture must be approached according to its economic culture. Consequently,

Argentina, Mexico and Thailand find themselves on the threshold of different economic

futures: Mexico showing considerable promise, Argentina facing continues jeopardy and

long-term uncertainty, Thailand is recovering but with uncertain future. By comparison

and contrast of the choices taken in Argentina, Mexico and Thailand indicates a number

of the key requirements for the successful reform of centralized economies. To measure

these economic reforms, the paper will examine the comparative evaluation all these

reforms strategies and implementation in contrast and comparison with these different

economic cultures.

Mexico Reforms

Two decades of social and economic deterioration in Mexico & Argentina. Since

1976, the Mexican Government has submitted seven Letters of Intent to the IMF and

signed two additional Interim Agreements with the Fund. These accords include

guidelines and limitations on the use of the most important instruments of

macroeconomic policy (i.e., monetary and fiscal policy), and they cover both internal
Global Financial Crises 28

issues and the management of external accounts. There are three distinct periods in the

history of the agreements between the Mexican government and the IMF. The first phase,

from 1982 to 1987, is known as the period of orthodox adjustment, because

contractionary policies dominated the policy mix. A second stage of "unorthodox"

adjustment starts in 1988 and is based on the premise that anti-inflationary policies could

be implemented without producing a recession in the economy. Prior to the crash of the

peso in December 1994, the international financial institutions (IFIs) had lauded Mexico's

compliance with the adjustment program and cited the government as the "model

student" for other Latin American countries to follow. It was only when the "peso crisis"

hit, that the Fund argued that the government had not fully followed its prescriptions

(IMF, 2002). The following forced Mexican authorities to request IMF assistance, which

was granted on a strict quid-pro-quo basis:

1. By 1982, Mexico had accumulated a US$8 billion backlog in payments on

its external public debt and faced the prospect of another US$14 billions

accumulating over the next three years.

2. Domestic demand was reduced as a result of the sharp drop in real wages:

between 1982 and 1987, 45 and 40 percent reduced minimum and

contractual wages, respectively, in real terms. The decline in international

oil prices in 1986 and the collapse of the Mexican stock market in 1987

wiped out all hopes of recovery, and the government began its quest for a

new adjustment program.

3. The Mexican government appealed to the IMF for assistance. After

consultations, an Enhanced Fund Facility totaling US$3.9 billions,


Global Financial Crises 29

equivalent to 450 percent of Mexico's IMF quota, was approved. The

stated objectives of the three-year package were to assist in reducing the

external deficit, control inflation, restart the growth process, increase

employment and lower the fiscal deficit.

4. A restrictive monetary policy was to be adopted in order to maintain price

stability. The exchange rate would be adjusted and exchange controls were

to be replaced by a dual-exchange-rate system. In addition, the fiscal

deficit would have to be cut from 8.5 to 5.5 percent of GDP.

5. The IMF corresponded by supporting the renegotiation of US$23 billions

of Mexico's foreign debt, the extension of amortization terms from six to

ten years, and the reduction of interest rates from 2.25 points to 1.5 over

the London Inter-bank Offer Rate (Libor), and from 2.2 to 1.2 points over

the U.S. prime rate.

6. In 1985, the third year of the agreement, the fall in oil prices translated

into renewed difficulties and additional pressure on Mexico's balance-of-

payments position. The Mexico City earthquake further aggravated the

economic situation. During 1986, the Mexican economy was subjected to

another serious external shock as oil prices plummeted. Foregone income

due to the depressed prices amounted to more than US$11 billions or six

percent of GDP.

7. The government once again appealed to the IMF, and an agreement was

signed providing emergency support for an amount equivalent to 1.4

billion in Special Drawing Rights (SDRs).


Global Financial Crises 30

8. In 1989 a new agreement was reached with the IMF for credits of 2.7

billion SDRs (equivalent to US$3.6 billion), to be used in part for the

servicing of rescheduled external debt. Once again, the objective of the

agreement was to attempt to restart growth and generate employment, as

well as to reduce inflation to 18 percent.

9. Between 1990 and 1994, Mexico increasingly relied on short-term capital

inflows to finance its current-account deficit, and there was no need for

other agreements with the IMF. The trade deficit was responsible for 65

percent of the current-account imbalance [$29662 billions]. Capital flows

ceased after the first quarter of 1994, reserves from $25299 billion in 1993

to $6441 billion in 1994. High interest rates were offered as a risk

premium, but when portfolio investments failed to materialize, protection

was added against exchange-rate changes by dollar-denominating US$28

billions in Treasury bills (Tesobonos).

10. By mid-1994 the markets had reached the conclusion that the current-

account deficit was unsustainable. Reserves were nearly exhausted as the

year drew to an end, and by 22 December 1994 they were equivalent to

less than two months of imports (about US$6 billions). Devaluation was

followed by a stabilization program based on reductions in public

expenditure, hikes in taxes and prices of public-sector goods and services,

a stringent monetary policy and wage controls. An international financial

rescue package was used to meet the dollar-denominated short-term debt

accumulated during 1994 (Center for economic Studies, 2003).


Global Financial Crises 31

In 1995, Mexico was forced to request urgent assistance from the IMF. In January 1995

the Mexican government submitted a Letter of Intent to the IMF and a new agreement

was reached with two basic objectives: adjustment of external accounts and stabilization

of the main macroeconomic aggregates. The government was granted a contingency

credit for 5.25 billion SDRs (equivalent to US$7.75 billion dollars) in order to help

Mexico redress the negative trends in its balance of payments. This agreement was part of

a larger financial rescue package involving the U.S. Treasury Department's Exchange

Stabilization Fund US$18 billion and the Bank of International Settlements. The rescue

package was designed primarily to pay the short-term debt and forestall a default on

Mexico's outstanding debt. Therefore, after the last reform that was introduced by the

IMF, privatizations were to be accelerated, as economic deregulation and trade

liberalization proceeded. Special attention was given to eliminating restrictions in the

area of foreign direct investment, where 100% foreign ownership was to be authorized. In

the realm of trade liberalization, perhaps the most important commitment was to

accelerate negotiations and wrap up Mexico's accession to the WTO. Mexico also agreed

to substitute tariffs for the vast majority of its quotas in less than 30 months and to reduce

tariff levels on most goods. Finally, alleviating the pressures of Mexico's foreign debt was

another important policy objective of the series of agreements signed with the IMF.

However, 16 years after the 1982 debt crisis, the problem remains unsolved. In 1982, the

total foreign debt amounted to US$86,019 billions, of which US$57 billions were public

debt. In 1993, at the height of the Salinas Administration, the debt had surpassed US$118

billions, of which US$80 billions was the result of public borrowing abroad. And, at the

beginning of 1997, Mexico's total foreign debt amounted to $149301 billions, of which
Global Financial Crises 32

US$99 billion was public debt. The average annual growth rate of foreign debt during

this period, achieved under macroeconomic policy promoted and approved by the

International Monetary Fund, was 5.7%, while the economy maintained a mediocre

average rate of growth during the same period of 1.8 percent. In all, privatization was

intended to generate US$6 billions dollars in 1995 and between US$6 and 8 billions in

1996. Thus, structural reform responded more to short-term objectives rather than to the

need for a more robust long-term economic growth. GDP grew by 5.2 percent in 1996

and seven percent in 1997, although on a per capita basis, these increases were just 3.4

and 5.2 percent, respectively. The government achieved a US$6.9 billions budget surplus

as of June 1998. These indicators, however, mask a continuing crisis for the Mexican

people. Government spending was cut drastically to achieve the fiscal surplus, in good

part because the government was forced to spend over US$55 billions to bail out the

banking sector. In 1998, oil prices dropped by 30 percent, leading to further cuts in social

spending and public investment. Mexico's trade surplus dropped from US$7.7 billions in

1995 to US$1.4 billion in 1997. Average real wages continued to fall in 1996 and 1997,

and un- and underemployment levels remained high (Center for economic Studies, 2003).

Mexico restored microeconomic stability and resumed after 1995. External

financing supported the reforms programs. The effort was made to restructure the

banking system and in the implementation of reforms to strengthen the economies

growth. The IMF reforms as follow:

1. Fiscal Policy reforms

2. Tax system reforms

3. Control over non-interest expenditure


Global Financial Crises 33

4. Revenue sharing and expenditure responsibility between local and federal level

5. Reforming treasury operation and management

6. Monetary policy reforms

7. Minimum wage reform and negotiation

8. Structural reforms (banking system, and social security)

9. Action and reforms to enhance labor productivity, divest public enterprises and

increase private sector participation

10. Debt management strategy (lowering the financing costs of Mexico’s public debt)

11. Alleviate poverty and provide social safely nets (IMF-Mexico, 2004)

Furthermore, in 1993, Mexico's current-account deficit surpassed [1993-$23400 billions]

and then increased to [1994-$29662 billions]. It is obvious that the international financial

community judged the deficit unsustainable and investors feared an adjustment via

devaluation. Capital flight took the form of a reversal of capital flows. Exchange-rate

guarantees were issued to holders of Mexican Treasury Bonds (Tesobonos), but even this

could not stem the tide.

Argentina Reforms

Argentina entered what would become a long lasting economic recession. During

the last days of 2001 and the beginning of 2002, the recession imploded into the deepest

economic crisis for a hundred years (Council of Foreign Relations, 2004). Throughout the

1990s the regime of former president Carlos Menem pegged the Argentine peso to the US

dollar, lowered import tariffs, abolished restrictions on capital flows and privatized the

majority of government-owned assets.

The strong peso and a massive expansion of personal debt allowed a consumer boom for
Global Financial Crises 34

the middle classes, who sated themselves on televisions, hi-fis and the expensive four-

wheel-drive cars that invaded Argentina’s once peaceful beaches in the 1990s. The

consumption boom, however, was built on sand. The strong peso depended not on the

productivity of the Argentine economy, but on a doubling of the country’s foreign debt to

around $145 billions by the end of 2001, and the constant sale of state assets. By the end

of the 1990s, the foreign money had run out, Argentine industry and exports had been

priced out of the market by the strong peso, and Argentina was finding it near impossible

to meet around $19 billions dollars annually in interest payments on the foreign debt

alone. The response of the IMF was to grant successive ‘aid’ packages, while insisting

that Argentina reduced its government deficit by cutting spending. This was always a

dubious proposition, given that the government deficit was due, to a large degree, to ever-

greater foreign debt payments. The result was a collapse of what was left of Argentine

industry, unemployment levels of 25 per cent, and, eventually, the political explosion of

December. In the meantime, Argentina finally declared default on its foreign debt and

devalued the peso after 10 years of ‘convertibility (Ecologist online, 2003). Argentina

had various fundamental problems that brought it to its current, deplorable position with

massive loss of wealth and increase in misery.

1. Argentina’s debt could not continue to grow and be serviced by Argentina’s

economy and exports. Astute observers recognized publicly more than a year ago

(and privately as early as 1999) that Argentina’s foreign currency denominated

debt was unsustainable.

2. Argentina’s budget deficit increased its debt and undermined its monetary policy.

The convertibility law tied the peso to the dollar and permitted unrestricted
Global Financial Crises 35

convertibility at a fixed exchange rate. This arrangement could not cope with an

unsustainable debt on one side and an overvalued exchange rate on the other. The

appreciation of the dollar and the depreciation of the Brazilian real made

Argentina ‘san unattractive place for investment and a costly place to buy.

3. Argentina made reform, in the early 1990s, but it did not develop a budget policy

or pass a fiscal responsibility law that controlled provincial spending. And it did

not remove some of the structural impediments to growth.

4. Argentina has one of the most regulated labor markets in the world. Those rules

make it difficult and costly for employers to dismiss workers, so companies don't

hire workers in the first place.

IMF has not ignored Argentina In March 2000 it offered a $7.2 billions loan. In January

2001, when the sustainability of Argentina’s debt was very much in doubt, it offered $7

billion more as part of a $20 billion official package. In August 2001, it advanced an

additional $5 billion to prevent a banking and currency run. It should be clear to all that

more money without policy changes did not work (Carnegie Mellon, 2005). Argentina

crises also were the result of weak financial systems that became too exposed to

exchange rate risks as well as large-scale capital inflows driven by cyclical downturns in

the industrial countries in the early 1990s. To this can be added a build-up of excess

demand; rising asset prices fueled by strong credit expansions; speculative and often

imprudent investment decisions; weak governance of enterprises, banks, and in the public

sector; and a general lack of transparency. Argentina's problems do not stem from the

1991 Convertibility Law that linked the peso at a fixed one-to-one rate with the dollar

and made the peso convertible on demand, as critics of that reform claim. To the contrary,
Global Financial Crises 36

the problems stem from the government's seemingly insatiable thirst for money. The

currency board, which prevents the central bank of Argentina from printing more pesos

than the dollar-denominated reserves that it holds, has made that thirst more apparent

(IMF Website, 2003). The IMF reforms to Argentina’s problem as follow:

1. Fiscal Policy reforms.

2. Currency exchange rate or convertibility Reforms.

3. Structural reform.

4. Fiscal convertibility law.

5. Reform the tax-sharing regime.

6. Tax administration.

7. National Mortgage Bank Reforms

8. Leasing of telecommunications frequencies

9. Financial polices Reforms

10. Provincial Financial Reforms.

11. Labor market reform.

12. Social Security Reforms.

13. Reform of Revenues sharing System.

14. Trade Policy Reform.

15. Monetary policy reforms.

16. Debt management strategy (lowering the financing costs of Argentina’s public

debt).
Global Financial Crises 37

(EIU, 2008)

According to the Argentina’s economic data, Argentina problem started well

before the 2001 financial crisis. The government spending at state and federal levels has

increased from 38.9 percent of gross domestic product to 49.4 percent since 1997. Hence,

IMF introduced reforms and financial assistance might work well if Argentina adapts

feasible macroeconomic strategy. In 1999 portfolio equity was negative -$10773 millions

and in 2002 -$81 millions. And foreign investment in 2001 was $2166 millions and in

2002 $785 millions. This provides that the economy still not stable and foreign investors

are hesitating in investing in Argentina Furthermore; the current account balance was

deficit -$12344 millions in 1997 through 1999, and in 2000 the deficit was -$8970

millions. GNP is decreasing in 2001 $260454 billions and in 2002 $95584 billions. The

GDP in 1999 was -3.2, in 2000 was -5.3, and GDP per capita in 1999 was -4.66. The total

debt was similar in the period of 1997 through 2000 and in 2002 $132314billion. This

indicates the economy is not recovering even though the IMF has had introduced and
Global Financial Crises 38

implemented so many reforms programs and the problem still exists by today standards.

Thailand’s Reforms

Thailand problem was prior to 1997 financial crisis, for example external

developments problem, and weakness in financial and corporate systems. The external

imbalances were a reflection both of strong private capital inflows and of high domestic

private investment rates, and were exacerbated, prior to the crisis, by appreciation of the

U.S. dollar to which the currencies of the countries concerned were formally or

informally pegged.

The IMF reforms were for example, a comprehensive strategy to restructure the

financial sectors; strengthen supervision of the financial sector and improve disclosure

and transparency and develop credit culture. The weaknesses of the financial and

corporate sectors contained several elements, including pre-existing weaknesses in

financial institutions' portfolios; un-hedged foreign currency borrowing that exposed

domestic entities to significant losses in the event of domestic currency depreciation;

excessive reliance on short-term external debt; and risky investments against the

backdrop of bubbles in stock and property prices. These elements had been building up in
Global Financial Crises 39

an environment of large private capital inflows and rapid domestic credit expansion in

liberated financial systems, where implicit government guarantees remained pervasive,

and supervision and regulation were not up to the challenges of a globalizes financial

market. These circumstances, a change in market sentiment could and did lead into a

vicious circle of currency depreciation, insolvency, and capital outflows, which was

difficult to deal or handle in time. On August 20, 1997, the IMF's Executive Board

approved financial support for Thailand of up to SDR 2.9 billion, or about US$4 billion,

over a 34-month period. The total package of bilateral and multilateral assistance to

Thailand came to US$17.2 billion. Thailand drew US$14.1 billion of those amounts

before announcing in September 1999 that it did not plan to draw on the remaining

balances, in light of the improved economic situation (IMF, Thailand, 2005). The

following are the IMF reforms fro Thailand:

1. Reform macroeconomic policies.

2. Fiscal Policy reforms.

3. Financial Sector Restructuring

4. The need for corporate debt restructuring.

5. Monetary and Exchange Rate Policy.

6. Financial Sector Restructuring.

7. Disposition of the Assets of the Closed Finance Companies.

8. Measures to Strengthen the Remaining Financial Institutions.

9. Capital Market Development.

10. Debt management strategy (lowering the financing costs of Thailand’s public

debt).
Global Financial Crises 40

Therefore, Thailand's economy returned to positive growth in late 1998, and GDP growth

reached over 4% in 1999 and should grow by 4.5% to 5.0% in 2000. The balance of

payments is expected to remain strong in the near term, even as the current-account

surplus declines as the recovery proceeds. Foreign-exchange reserves remain within the

$32 to 34 billion range envisioned in the program. Despite of what said about the IMF

reforms the Thai economy exhibited some signs of economic recovery in 1999. Thailand

reserves in 1999 were $34,781 millions country's solvency in terms of having adequate

foreign reserves to meet its potential obligations has been achieved. Capacity utilization

and production have increased significantly in many sectors. The growth of export value

in US dollar has surpassed the original target. Quarterly GDP growth has been positive

and increasing since the first quarter of 1999, driven particularly by high growths of the

manufacturing sector. Thailand’s GDP growth started to become positive from the first

quarter of 1999, increasing by 0.9% compared to the same quarter of 1998. GDP growth

increased to 3.3% in the second quarter and 7.7% in the third quarter. Manufacturing

growth has been particularly impressive; increasing by 6.6%, 9.5% and 17.4% in the first

second and third quarter respectively. Domestic expenditure for this sector grew by

10.9% in the second quarter of 1999 and by 37.3% in the third quarter. Overall growth

was also helped by the recovery in export growth. Export value in US dollar for the first

eleven months of 1999 increased by 6.7% compared to the same period of 1998. Imports

value in US dollar for the first eleven months increased by 15.4% compared to the same

period in 1998 (5.1% increase in Baht value). The current account has continued to

remain in surplus, with the total for the first eleven months being 10.4 billions US$. At

the same time, net repayment of foreign debt by the private sector amounted to 12.8
Global Financial Crises 41

billions US$ during the same period. Therefore, the entire current account surplus was

used to reduce the foreign debt burden of the country. Currently, the foreign reserve

position of the country is very healthy when compared to the outstanding short-term

foreign debt (Chalongphob, 2003).

3. Global Financial Crises

The nature of the Asian financial crisis is explored and the underlining causes of

their global nature. By examining the Asian financial crisis in Thailand a result of an

overvalued exchange rate, excessive government borrowing, or too much consumption of

import. Moreover, the paper will examine what precipitated the crisis in Mexico and

Argentina.

Asian Financial Crisis

First, Asian crisis of 1997; Thailand was borrowing form abroad to finance

domestic investment. Investment rates and capital inflows in Asia remained high even

after the negative signals sent by the indicators of profitability. This occurred for many

reasons:

• Japan interest rate fall, lowered the cost of capital for firms and motivated large

financial flows into the Asian countries. Moreover, Asian financial and banking

sectors, lacks supervision and has weak regulation, low capital adequacy ratios,

lack of incentive-compatible deposit insurance schemes, insufficient expertise in

the regulatory institutions, distorted incentives for project selection and

monitoring, outright lending practices, non-market criteria of credit allocation.

Additionally, international dimension of the moral hazard problem hinged upon

the behavior of international banks, which over the period leading to the crisis
Global Financial Crises 42

had lent large amounts of funds to the region’s domestic intermediaries, with

apparent neglect of the standards for sound risk assessment.

• A very large fraction of foreign debt accumulation was in the form of bank-

related short-term un-hedged, foreign-currency denominated liabilities and the

long period stagnation of the Japanese economy in 1990s led to a significant

export slowdown from the Asian countries in the month preceding the eruption of

the crisis.

• Sector-specific shocks such as the fall in demand for semiconductors in 1996,

and adverse terms of trade fluctuations also contributed to the worsening of the

trade balances in the region between 1996 and 1997.

• The sharp appreciation of the US dollars relative to the Japanese yen and the

European currencies since the second half of 1995 let to deteriorating cost-

competitiveness in most Asian countries whose currencies were effectively

pegged to the dollar.

• The competitive pressures were enhanced by increasing weight of China total

export from the region, the expectation of a monetary contraction in the US in the

summer of 1997 may have also played a role in participating the crisis (Coresstti,

et al, 1998).

Factors Affected Asian Financial Crises

The following factors played a big role in the Asian crisis:

• Between 1990 and 1993, the Thai stock market rose by 175% [395% for property

sector], but then lost [51%-71%] for property sector of its value between [1990-
Global Financial Crises 43

1993] (p. 15). Asian countries were characterized by very high savings rates

through 1990s, in many cases above 30% (p. 17).

• High inflation might signal poor macroeconomic policy or sizeable fiscal

imbalances. Therefore, the nominal depreciation of Asian currencies in 1997 was

consistent with the expected inflationary consequence of banking and financial

bailout becomes inevitable (p. 18).

• In Thailand the Baht was effectively fixed between [25.2 – 25/$] from [1990-

1997]. And the real exchange rate has appreciated by 12%.

• In general an exchange rate appreciation was correlated with a worsening of the

current account. Countries with appreciating currencies generally experienced a

larger deterioration of the current account. The US dollar appreciated sharply in

the month leading to the crisis (p. 21).

• External liabilities in Korea increased from [$45 billions- $116 billions] in 1997.

In Indonesia, gross liabilities grow from [$37 billions-1993] to [$60 billion-

1997]. In Thailand gross liabilities grow from [$34 billion-1993] to [98 billions-

1997] (p. 34).

• The ratio of foreign liabilities to assets deteriorate severely in 1990, in Thailand it

reaches 1,103% in 1996. In Korea was [1996-375%], Indonesia [1996-424%], in

the Philippines was [1996-172%], Hong Kong [165%], Singapore [162%] and

Malaysia [148%] and China were [20%] for the same period (p. 34).

Thailand

According to Thailand central bank statistics, from a total of 240 banks in April

1996, 15 banks did not meet the required 8% capital adequacy ratio, 41 did not comply
Global Financial Crises 44

with legal spending limit, and 12 out of 77 licensed foreign exchange banks did not meet

the rules on net overnight position. Rapid growth within this deregulated system, along

with the struggle for market shares, resulted is a system containing an excessive number

of small-undercapitalized banks. Problem pointed by the IMF in November 1996 (p. 29).

By examining Thai relevant 2.2 data, the balance on the current account for Thailand

according to the data the deficit was [1980-$2076 millions] which indicates the demand

for US dollar and negative up to 1985, then surpluses in [1986-$247 millions] and then

was deficit in [1995-$13554 millions], in [1997-$3021 millions], which indicates the

demand for U$. This indicates that Thailand was trying to narrow the deficit on the trade

account. By comparison to S.E Asia market in the same period according to data in 1980

the balance on the current account deficit by $6033 millions, which indicates the demand

for U$. And in deficit up until 1986 and in 1987 were surpluses $8958 million and

surpluses in 1988 of $7653 millions and then surpluses in [1997-$7568] millions. Thus,

Thailand reserves in 1995 was $36936 millions and in [1997-$26897] millions which was

insufficient to cover the trade deficit and the short-term loans. Which will lead to

currency devaluation and/or depreciation.

Moreover, by examining the exchange rate for Thailand for the same period; in 1971 the

Thai Baht/1$ was 20.923 and stayed the same up 1980, and in 1981 was [23 Baht/1$] and

[1984-27.15 Baht/1$], from 1987 through 1996 was in [25 Baht/1$] range and all of

sudden in 1997 jumped up to [47.24 Baht/1$] and [44.22 Baht/1$] in 2001. The Thai

interest rate for the same period were 6.3% in 1976 and in 1982 were 11.3% in 1984

15.1%, in 1997 8.9% and in 1999 12.2%. Therefore, this indicates that the economy in

turmoil because of currency devaluation, higher interest rates, and the obvious trade
Global Financial Crises 45

deficit. Thailand and will not attract portfolio capital to the country on these current

conditions.

By examining Thai relevant 2.2 data, the deficit on the current account for Thailand

according to the data in 1989 was $2489 millions and the short-term loans were $6112

million and the reserves was $10508 millions, in 1990 the deficit was$7281 millions and

the short-term loans were $8322 millions and the reserves was $14,258 millions is not

enough to cover short-term loans and the deficit in the current account, this signal

financial uncertainty. And in 1994 the deficit was $8085 millions and the short-term loans

were $29179 millions and the reserves was $30280 millions, these quantities measures

indicates a financial crisis at the horizon and the financial stress continues. And in 1996

the deficit was $14691 millions and the short-term loans were $37613 millions and the

reserves was $38645 millions, the gap is getting bigger now the deficit is equal $13659

millions. And in 1997 the deficit was $3021 millions and the short-term loans were

$39836 millions and the reserves was $26897 millions, again the imbalance trade or trade

deficit continues. These quantities measures indicate the demand for US dollar

increasing. In addition, Thailand was trying to narrow the deficit on the trade account by

devaluating the Thai currency. By comparison to S.E Asia market in the same period

according to data in 1989 the deficit on the current account was $5544 millions. And in

1990 the deficit was $5282 millions and in 1994 the deficit was $17122 millions and in

1995 the deficit was $39681 and in 1997 was surplus of $7568 millions. Thus, Thailand

and the S.E Asia share analogues economic behavior. Possibly, because if China market

penetration strategies.
Global Financial Crises 46

The Thai GDP growth rates for the same period were in [1971-5%], in [1978-9.9%] and

in [1986-4.6%] and in [1989-13%], [1997 -1.4%] and finally in [2003 is 6.8%]. This

indicates that financial crisis affected the gross domestic product, possibly because the

financial institution failure in Thailand in that period and the economy was retrograding.

Thailand debit-t-GDP ratio was 33% of GDP in 1990. Thailand ratio was 13% until 1994

in 1996 in Thailand was 100%-123%, Korea was 54%-85%, Indonesia 177%-294%,

Malaysia [41%-69%], [Philippines 79%-137%] and in China [24%-39%]. This indicates

liquidity crisis in the SE Asia region, and economic failure in the region (p. 32).

By the end of 1996, a share of short-term liabilities in total liabilities above 50% was the

norm in the region. Moreover, the ratio of short-term external liabilities to foreign

reserves was above 100% in Korea, Indonesia and Thailand, which indicated that

financial fragility in the region. The current account imbalances in the Asian crisis;

according to the data several Asian countries whose currency collapsed in 1997 has

experienced somewhat sizable current account deficit for example, Thailand trade deficit

1980 was $2076 millions through 1997 $3021 millions. Based on the data the current

account in Thailand was over 6% of GDP in 1995 and 1996. According to the data Asian

countries in 1990, GDP growth rates were remarkably high in this period. Growth rate

averaging more than 7% of GDP (sometimes closer to 10%) were norm (p. 15).

South America Financial Crises-Mexico

The crisis in South America, Mexico, the domestic productive capacity has

collapsed in 1994. Between 1995 and 1997, more than a third of Mexico's businesses and

over 20,000 small and medium-sized enterprises declared bankruptcy. With domestic

demand still low, interest rates still high and barriers to imports falling. Since the collapse
Global Financial Crises 47

of the economy, the government has invested the equivalent of more than US$46 billions

in the banking system, an amount equivalent to 12 percent of the country's GDP and

twice the amount spent by the government on education and social development

combined. More than 50 percent of the banks' portfolios are overdue, as most businesses

and consumers cannot repay their loans. The Mexican episode, the deterioration of the

current account in years preceding the 1994 crisis was largely due to a fall in private

savings and boom in private consumption (p. 17).

Mexico’s relevant data will be based on many factors it starts with the balance current

account for Mexico according to the data file 2.2 the deficit of the current account for

Mexico in 1989 was $3958 millions, and the deficit in 1990 $7451 millions, in 1991

$13283 millions, 1992 $24442 millions, in 1993 $23400 millions, in 1994, $29662

millions, in 1995 $1576 millions; hence, the current account deficit stayed until 1997,

$7454 millions. The current account deficit created huge demands for the US dollars

since 1988-89 and this problem existed before the actual Mexican crisis took place. By

comparison Mexico current account balance (deficit) with Latin America current account

balance, according to the data in 1989 the current account deficit for Latin America was

$8586 millions, which means the demands for US dollar for the whole region was huge.

And Latin America current account stayed deficit up until 1997, which was $65214

millions. This illustrates the analogues relation between Latin economy as in general and

Mexico as country; both had current account surpluses in 1984 and have similar market

behavior for the rest of the years (1989-1997). Therefore, interest payments on heavy

foreign borrowing have exacerbated the current account deficit. In order to pay back the

U.S. Treasury its bailout loan, the Mexican government borrowed extensively in
Global Financial Crises 48

international private markets. It offered rates of five percent above what is normal, taking

on extensive obligations. Today, a large percentage of Mexico's reserves are borrowed

monies, an extremely precarious situation, even by IMF standards (p. 18).

Moreover, measure of the adequacy of foreign exchange reserves is the ratio of money

assets to foreign reserves. This well illustrated by the Mexico’s reserves in 1989 were

$6740 millions, which will not cover the current account deficit of $3958 plus and short-

term loans both total $12620 millions. The reserves in 1993 the reserves was $25299

millions and the current account deficit was $23400 millions, and the short-term loans

were $36257 millions. By adding short-term loans and the deficit will equal $59657

millions, this indicates the country financial crisis started well before 1989. This

eventually led to financial crisis and currency devaluation to cover the deficit gap in

addition to other major economic reforms that was induced by IMF. Hence, this means

that reserves did not cover short-term loans and this could be one of the reasons of

Mexico financial crisis. The change and the deficit in the current account and in the

reserves paved the way for Mexico financial crisis in 1994. The financial crisis will

continue if current account and reserves and short-term loans are not in equilibrium.

Because of the existence of large foreign reserves facilitates the financing of a current

account deficit, and enhance the credibility of a fixed exchange (p. 35).

Thus, the Mexican currency devaluation could also be examined by the exchange rate for

Mexico, in 1985 the currency was devaluated form [U$/371.7 pesos] and devaluated to

[U$/ 0.92] in 1986, in the same time in the black market premium was 6.12%. In 1989

the currency exchange rate equal to [2.64 Peso/U$] in the black market was % 11.13.

Moreover, the devaluation increased in 1993 to [U$/3.105 peso] and in the black market
Global Financial Crises 49

premium was 1.80%, in 1994 the exchange rate was [U$/ 5.35] and finally in [2001-U$/

9.14]. Hence, this indicate that the economy in turmoil, this would indicates financial

trouble and possible inflation. Therefore, the portfolio equity according to the chart

started to aim at Mexico in 1990, which was $563 millions and was growing

exponentially in 1993 was $14,297 millions and dropped in 1994 to $4,521 millions and

deficit in 1998 of $665 and finally deficit in 2002 $104 million.

The Mexican Treasury bill interest rate for the same period in were 1988 103.7% and in

1990 44.99% and in 1994 14.99%, in 1996 48.44%. This indicates that Mexico was

using concretionary monetary policy (raise interest rates and lower income); and possibly

attracted equity portfolio. The real interest rate was nil before 1993. In 1993 was 11.2%

in 1994 11.4% and in 1996 4.7% it looks after 1994 that Mexico was applying

expansionary monetary policy (reduce interest rates and raise income).

The Mexican GDP growth rate for the same period was [1989-1.3%], and in [1991-4.2%]

and in [1993-2%], in [1994-4.5%], [1995 -6.2%], [1996-5.1%] and finally in [2003-

1.5%]. Since the GDP in 1993 was 2% and the world average was 3.3% indicating that

financial crisis on the horizon and Mexico and slow growth might also contributes to the

reasoning of crisis on the horizon.

4. Contagion Effect

The contagion affects the concept that under globalization, a financial crisis in one

country may affect those around it. Thus, I will examine what participated in Mexico

peso crisis in Latin America, and Thailand and East Asia crisis and their relation to the

contagion effect.
Global Financial Crises 50

Mexico

Mexico and Latin America region, the domestic productive capacity has collapsed

in 1994. Between 1995 and 1997, more than a third of Mexico's businesses and over

20,000 small and medium-sized enterprises declared bankruptcy. With domestic demand

still low, interest rates still high and barriers to imports falling. Since the collapse of the

economy, the government has invested the equivalent of more than US$46 billion in the

banking system, an amount equivalent to 12 percent of the country's GDP and twice the

amount spent by the government on education and social development combined. More

than 50 percent of the banks' portfolios are overdue, as most businesses and consumers

cannot repay their loans. The Mexican episode, the deterioration of the current account in

years preceding the 1994 crisis was largely due to a fall in private savings and boom in

private consumption (Coresstti, et al. 1998).

Mexico’s relevant data will be based on many factors it starts with the balance

current account for Mexico according to the data file 2.2 the deficit of the current account

for Mexico in [1989-$3958 millions], and the deficit in [1990-$7451 millions], in [1991

$13283 millions], in [1992 $24442 millions], in [1993-$23400 millions], in [1994-

$29662 millions], in [1995 $1576 millions]; hence, the current account deficit stayed

until [1997-$7454 millions]. The current account deficit created huge demands for the US

dollars since 1988-89 and this problem existed before the actual Mexican crisis took

place. By compare Mexico current account balance (deficit) with Latin America current

account balance, according to the data in 1989 the current account deficit for Latin

America was $8586 millions, which means the demands for US dollar for the whole

region was huge. And Latin America current account stayed deficit up until 1997, which
Global Financial Crises 51

was $65214 millions. This illustrates the analogues relation between Latin economy as in

general and Mexico as country; both had current account surpluses in 1984 and have

similar market behavior for the rest of the years (1989-1997). Therefore, interest

payments on heavy foreign borrowing have exacerbated the current account deficit. In

order to pay back the U.S. Treasury its bailout loan, the Mexican government borrowed

extensively in international private markets. It offered rates of five percent above what is

normal, taking on extensive obligations. Today, a large percentage of Mexico's reserves

are borrowed monies, an extremely precarious situation, even by IMF standards (p. 18).

This Mexican currency devaluation could also be examined by the exchange rate for

Mexico, in 1985 the currency was devaluated from [1U$/371.7 pesos] to [U$/ 0.92-

1986], in the same time in the black market premium was 6.12%. In 1989 the currency

exchange rate were equal to 2.64 Peso/U$ in the black market was % 11.13. Moreover,

the currency devaluation and appreciation increased in 1993 were U$/3.105 peso and in

the black market premium was 1.80%, in 1994 the exchange rate was U$/ 5.35 and

finally in 2001 U$/ 9.14. Hence, this indicate that the economy in turmoil, this would

indicates financial trouble and possible inflation. Therefore, the portfolio equity

according to the chart started to aim at Mexico in 1990, which was $563 millions and was

growing exponentially in 1993 was $14,297 millions and dropped in 1994 to $4,521

millions and deficit in 1998 of $665 and finally deficit in 2002 $104 million.

Furthermore, the Mexican Treasury bills interest rate for the same periods were in 1988

103.7%, in 1990 44.99%, in 1994 14.99%, and in 1996 (48.44%). This indicates that

Mexico was using concretionary monetary policy (raise interest rates and lower income);

and possibly attracted equity portfolio. The real interest rate was nil before 1993. In 1993
Global Financial Crises 52

was 11.2% in 1994 11.4% and in 1996 4.7% it looks after 1994 that Mexico was applying

expansionary monetary policy (reduce interest rates and raise income).

Thailand

1997crisis in Thailand and S.E Asia region; Thailand was borrowing form abroad to

finance domestic investment. Investment rates and capital inflows in Asia remained high

even after the negative signals sent by the indicators of profitability. This occurred for

many reasons, for example, Japan interest rate fall, lowered the cost of capital for firms

and motivated large financial flows into the Asian countries. Moreover, Asian financial

and banking sectors, lacks supervision and has weak regulation, low capital adequacy

ratios, lack of incentive-compatible deposit insurance schemes, insufficient expertise in

the regulatory institutions, distorted incentives for project selection and monitoring,

outright lending practices, non-market criteria of credit allocation. The competitive

pressures were enhanced by increasing weight of China total export from the region, the

expectation of a monetary contraction in the US in the summer of 1997 may have also

played a role in participating the crisis (Corestti, et al. 1998). By examining the 2.2 data

in 1994 Thailand deficit was $8085 millions and the short-term loans were $29179

millions and the reserves was $30280 millions, this also negative and the financial stress

continues. And in 1996 the deficit was $14691 and the short-term loans were $37613

millions and the reserves was $38645 millions, the gap is getting bigger now the deficit is

equal $13659 millions. And in 1997 the deficit was $3021 millions and the short-term

loans were $39836 millions and the reserves was $26897 millions, again the unbalance

trade or trade deficit continues. This indicates the demand for US dollar increasing. This

indicates that Thailand was trying to narrow the deficit on the trade account by
Global Financial Crises 53

devaluating the Thai currency. By comparison to S.E Asia market in the same period

according to data in 1989 the deficit on the current account was $5544 millions. And in

1990 was $5282 millions, in 1994 $17122 millions, in 1995 $39681 millions, and in 1997

were surplus of $7568 millions. Thus, Thailand and the S.E Asia share analogues

economic behavior, but the current account for region in 1997 was surplus (China and

Singapore economies) and in Thailand was deficit (financial institutions corruption).

Moreover, by examining the exchange rate for Thailand for the same period; in 1989 the

Thai Baht was 5.69/1$ and the black market premium was 5.10%, in 1990 U$/25.69 and

the black market premium 1.62% and in 1994 was U$/28.09 and the black market

premium (0) and in 1997 U$/47.24 and the black market premium 3.08%, in 1998

U$/36.69 and the black market premium (0) and finally in 2000 U$/44.22. This indicates

of currency had been devaluated many times in few years and the black market premium

in 1997 was 3.08% which cause inflation in the economy. Thus this inflation caused by

the economic uncertainty and economic crisis in Thailand.

The Thai Treasury bill interest rate for the same period were in 1989 7.5%, in 1990

8.09%, in 1996 %10.75, in 1997 10.75% and finally in 2003 were 3.76%. The Thai real

interest rate were in 1989 was 5.8%, in 1990 8.2%, in 1994 5.4% and in 1997 8.9% and

finally in 1999 12.2%. This indicates Thai government and Thai financial institutions

attracting foreign capital into the country because the interest rate is attracting in both

Treasury bill and real interest rate.

During the 1990s the lending boom in Thailand was 58% comparing to Mexico and the

‘Tequila effect’ countries, between 1990 and 1994 the lending boom in Mexico 116%. In

Thailand the lending boom was significantly larger for finance and securities companies
Global Financial Crises 54

was 133%. By 1997, non-performing loans of local banks in Thailand were 15%. Asset

deflation and the sharp drop in the value of the collateral especially real estate triggered

the irreversible surge in the share of non-performing loans (p. 28).

According to these financial crises, a country may suffer a short-run liquidity

problem when available stock of reserves is low relative to the overall burden of external

debt services (interest payment plus renewal of a loans coming to maturity) Liquidity

problems emerge when panicking external creditors—perhaps in response to rapid

devaluation—become unwilling to role over existing short-term credit. If a large fraction

of a country’s external liabilities are short-term, a crisis may take a form of pure liquidity

shortfall. Hence, the inability by country to roll over its short-term liabilities for example

the experience of Mexico with its short-term public debit that is analogues of had

happened in Thailand, Mexico and Argentina banking system.

In 1999 the per capita growth rate in Thailand 3.33%, in Mexico 1.737% and Argentina

-4.66%, by contrast to 1997, Mexico 3.38%, Thailand 4.8% and Argentina 4.18%. This

indicates the economy still staggering in theses nations.

Therefore, these countries total debit, for example in Thailand in 1997 was $109,669

millions, Mexico in 1997 $147,632 millions and in Argentina in $128,411 millions. By

contrast the balance on the current account in 1997 for Thailand was a deficit of $3,021

millions, Mexico deficit of $7,454 millions, and Argentina deficit $12,344. This indicates

the imbalance between debit and current account balances and reserves, which might

indicate financial problem on the horizon and might influence currency exchange rate and

inflows of portfolio equities.

As explained by Federal Bank of San Francisco that


Global Financial Crises 55

“The Mexican financial crisis with return data on domestic stock indexes and
closed-end country equity funds for Asian and Latin American countries. They
find that the Mexican shock spilled over strongly to other countries in Latin
America, and to a lesser extent "passed through" Asian country funds traded in
New York to stock markets in Asia. The authors also assess the extent to which
these spillover effects can be attributed to economic fundamentals, and conclude
that countries with weaker external positions, as measured by high debt-export
and current account deficit-GNP ratios, or low foreign reserve-GNP ratios,
experienced more adverse spillover effects” (Federal Reserve Bank of San
Francisco, 2002).

Contagion effect as explains by Kristin J. Forbes of the National Bureau of Economic

Research “that the measure whether trade linkage are important determinants of country’s

vulnerability to crisis that originate elsewhere in the world. Trade can transmit crisis

internationally via distinct channels:

• The competitiveness effect (inability to compete aboard)

• Income effect (crisis reduce income, reduce export price)

• Cheap import affects

In 1990’s was pointed by series of financial and currency crisis: the Mexican Peso

collapse in 1994; East Asia crisis in 1997-98; Russian collapse in 1998 and devaluation in

Brazil and Ecuador. The channels that produce the contagion effect are:

• If the two countries trade directly, export to the same country or compete in the

same industries.

• The crisis in one of the countries could change the relative price and quantities of

good traded (Forbes, 2003)

Hence, the contagion effect and currency devaluation was due to: the Asian financial

crisis started with the devaluation of Thailand’s Bath, which took place on July 2, 1997, a

15 to 20 percent devaluation that occurred two months after this currency started to suffer
Global Financial Crises 56

from a massive speculative attack and a little more than a month after the bankruptcy of

Thailand’s largest finance company This first devaluation of the Thai Baht was soon

followed by that of the Philippine Peso, the Malaysian Ringgit, the Indonesian Rupiah

and, to a lesser extent, the Singaporean Dollar. This series of devaluations marked the

beginning of the Asian financial crisis. This first sub-period of the currency crisis took

place between July and October of 1997.

Additionally, sub-period of the currency crisis can be identified starting in early

November 1997 after the collapse of Hong Kong’s stock market (with a 40 percent loss in

October). This sent shock waves that were felt not only in Asia, but also in the stock

markets of Latin America (most notably Brazil, Argentina and Mexico). In addition to

these stock markets, were those of the developed countries (e.g. the U.S. experienced its

largest point loss ever in October 27, 1997, which amounted to a 7 percent loss). These

financial and asset price crises also set the stage for this second sub-period of large

currency depreciations. This time, not only the currencies of Thailand, the Philippines,

Malaysia, Indonesia and Singapore were affected, but those of South Korea and Taiwan

also suffered. In fact, the sharp depreciation of Korea’s Won beginning in early

November added a new and more troublesome dimension to the crisis given the

significance of Korea as the eighth largest economy in the world; the magnitude of the

depreciation of its currency which took place in less than two months; and the Korean

Central Bank’s success in maintaining the peg ever since the Thai’s first devaluation (i.e.

the “nominal anchor” of the largest of the Asian Tigers was suddenly lost). In addition,

was the other important component of this second sub-period: the complete collapse of

the Indonesian Rupiah that started at about the same time (Garay, 2003).
Global Financial Crises 57

5. Moral Hazard

Mexican crisis in 1994 and Thailand financial crisis in 1997 are explored to see if

there is evidence of such moral hazard. In addition, the paper will we will examine the

concept of moral hazard. Moral hazard can be present any time two parties come into

agreement with one another. Each party in a contract may have the opportunity to gain

from acting contrary to the principles laid out by the agreement. The risk that a party to a

transaction has not entered into the contract in good faith, has provided misleading

information about its assets, liabilities or credit capacity, or has an incentive to take

unusual risks in a desperate attempt to earn a profit before the contract settles (Investopia,

2005).

Mexico

Mexico portfolio investment, the availability of lenders of last resort, such as the

Mexican rescue package provided by the U.S. and the International Monetary Fund that

minimized losses to creditors and providers of short-term capital to those countries,

results in reckless lending/investment behavior on the part of lenders and portfolio

investors because they know they will be bailed out in case of default.

Mexico’s relevant data will be based on many factors it starts with the balance current

account for Mexico according to the data file 2.2 the deficit of the current account for

Mexico in 1989 was $3,958 millions, and portfolio equity was zero; in 1990 the current

account deficit was $7,451 millions, and portfolio equity was $563 million and in 1991

the current account deficit was $13,283 millions, and portfolio equity was $4,404 million;

in 1992 the current account deficit was $24,442 millions, and portfolio equity was $6,365

million; and in 1993 the deficit was $23,400 millions, and the portfolio equity was
Global Financial Crises 58

$14,297 million and in 1994 the current account was a deficit of $29,662 millions, and

the portfolio equity was $4,521 million; and in 1995 the deficit was $1576 millions; and

the portfolio equity was $520 million; additionally the portfolio equity in 1996 was

$3,922. The current account deficit was increasing exponentially until [1997-$7,454

millions]. Furthermore, the total debt in 1992 was $112,309 million, in 1994 was

$140,202 million; in 1995 was $166,883 and in 1996 was $157,755. Which indicates

Mexico was heading towards financial turmoil.

By comparing Mexico current account balance deficit with Latin America current

account balance, according to the data in 1989 the current account deficit for Latin

America was $8,586 millions, which means the demands for US dollar for the whole

region was huge. And Latin America current account stayed deficit up until 1997, which

was $65214 millions. This illustrates the analogues relation between Latin economy as in

general and Mexico as country; both had current account surpluses in 1984 and have

similar market behavior for the rest of the years (1989-1997).

Current Account Balance

10000
0
1980
1981
1982
1983
1984
1985
1986
1987
1988

1990
1991

1994
1989

1992
1993

-10000
-20000 Latin America
-30000 Mexico

-40000
-50000
-60000
Year
Global Financial Crises 59

Therefore, interest payments on heavy foreign borrowing have exacerbated the current

account deficit. In order to pay back the U.S. Treasury its bailout loan, the Mexican

government borrowed extensively in international private markets. It offered rates of five

percent above what is normal, taking on extensive obligations. Today, a large percentage

of Mexico's reserves are borrowed monies, an extremely precarious situation, even by

IMF standards (Coresseti, et al, 1999).

IMF standards is well illustrated by the Mexico’s reserves in 1989 was $6,740 millions,

which will not cover the current account deficit $3,958 plus the short-term loans both

total $12,620 millions. The reserves in 1993 the reserves was $25,299 millions and the

current account deficit was $23,400 millions, and the short-term loans were $36,257

millions. By adding short-term loans and the deficit will equal $59,657 millions, this

indicates the country financial crisis started well before 1989. This eventually led to

financial crisis and currency devaluation to cover the deficit gap in addition to other

major economic reforms that was induced by IMF. Hence, this means that reserves did

not cover short-term loans and this could be one of the reasons of Mexico financial crisis.

The change and the deficit in the current account and in the reserves paved the way for

Mexico financial crisis in 1994.

Thus, the financial crisis will continue if current account and reserves and short-term

loans are not in equilibrium. Because of the existence of large foreign reserves facilitates

the financing of a current account deficit, and enhance the credibility of a fixed exchange

(35). Therefore, current account deficit created huge demands for the US dollars since

1988-89 and this problem existed before the actual Mexican crisis took place. In addition,

the portfolio equity was zero (1977-89) and by 1990 the portfolio equity was $563
Global Financial Crises 60

million and was in exponential growth up to 1993 $14,297 million just before the

Mexican crisis. This might indicates a moral hazard demonstrated in the behavior of the

portfolio equity above.

GDP Grow th Rates

10

2
Latin America
M exico
0

-2

-4

-6

-8
Y ear

Thailand

By examining Thailand relevant data (2.2), the current account was in huge deficit

according to the data. The current account in Thailand was deficit since 1980

($2,079million) up to 1995; the deficit was $13,554 millions and the short-term loans

were $41,095 million and the reserves was $36939 millions, in 1996 the current account

deficit was$14,691 millions; the short-term loans were $37,613 millions and the reserves

was $39,645 millions which s not enough to cover short-term loans and the deficit in the

current account. This signals uncertainty of financial future in the country. Moreover, in

1997 the current account deficit was $3021 millions and the short-term loans were

$29,660 millions and the reserves were $26,897 millions. These balances still in deficit

and the financial stress continue and the unbalance trade or trade deficit continues.
Global Financial Crises 61

Current Account Balance

20000
10000
0
-10000
82

84

86

88

90

92

94
80

96
East Asia & Pacific
19

19

19

19
19

19

19

19

19
-20000
Thailand
-30000
-40000
-50000
-60000
Year

Moreover, the portfolio equity was zero (1970-85). And in 1993 was $3,117 million; in

1994 it was a deficit of $538 million. In 1995 the portfolio equity was $2,154 million and

in 1996 was $1,551 million; and the deficit in 1997 was $308 and positive after that. This

indicates the demand for US dollar increasing. It also, indicates that Thailand was trying

to narrow the deficit on the trade account by devaluating the Thai currency. Furthermore,

Thailand total debt was in 1995 was $83,093 million, and in 1996 was $90,887 million

and in 1997 was $109,699 million; and in 1998 was $104,917 million. This indicates

Thailand economy is suffering greatly because its inability to cover short term loans and

balance its trade. Possibly foreign investments still hoping for the Thai economy to pick-

up or possibly theses foreign investment are in the real estate and were bought during the

economy boom and now their value had been devaluated or it might be moral hazard

demonstrated in the behavior of the portfolio equity above.

6. Direct Foreign Investment

The trends in Mexico before and after the Peso Crisis and after the formation of

NAFTA in relation to the trends that were implemented under the MAQUILA,
Global Financial Crises 62

MAQUILADORA and NAFTA programs are examined. Additionally, the paper will

explore the exchange rate, direct investment, portfolio equity, tariffs on imports, and

other trade measures. The Mexican economy experienced a sharp contraction in 1995,

after the Peso-devaluation of December 22, 1994. The GDP growth rate in 1987 was

-3.1%, in 1989 1.3%, in 1990 4.2% and in 1994 was 4.5% and reached rate of -6.2% in

1995, and became positive again during the first quarter of 1996. In 1996 and 1997 the

Mexican economy grew at healthy rates of 5.1% and 6.8% respectively. Thus, the

decisive response of the fiscal and monetary authorities supported by a generous financial

package of billions of dollars announced in March 9, 1995, were crucial for a rapid

recovery of lost investor confidence. These policies prompted a rapid stabilization of the

currency and a turnaround in investment and economic activity.

NAFTA

In 1991,Mexico the U.S. and Canada launched the negotiations over the terms of

the North American Free Trade Agreement (NAFTA). The NAFTA was officially

implemented beginning in January 1, 1994. By the time of the onset of the tequila, crises

most of these trade reforms had been implemented, and none were reversed as a result of

the crises. After Canada, Mexico and the United States adopted NAFTA in 1994, the

growth of Mexican maquiladora plants soared. These plants typically import U.S. inputs,

process them and ship them back to the United States. Because maquiladoras involve

U.S.–Mexico trade and their growth acceleration coincided with NAFTA's inception,

many concluded that the trade agreement caused this growth. A maquiladora is a labor-

intensive assembly operation. In its simplest organizational form, a Mexican maquiladora

plant imports inputs from a foreign country—most typically the United States—processes
Global Financial Crises 63

these inputs and ships them back to the country of origin, sometimes for more processing

and almost surely for marketing.

(Business Week, 1994)

(EPI, 1995)
Global Financial Crises 64

Maquiladora

A maquiladora is a labor-intensive assembly operation. In its simplest

organizational form, a Mexican maquiladora plant imports inputs from a foreign country

—most typically the United States—processes these inputs and ships them back to the

country of origin, sometimes for more processing and almost surely for marketing. The

maquiladora program itself permits the inputs and the machinery used to process them to

enter Mexico without payment of import tariffs. On the return to the country of origin,

again most typically the United States, the shipper pays only such return import duties as

are applicable to the value added by the manufacturing process in Mexico. The return trip

is not under the jurisdiction of the maquiladora program. The tariff arrangements involve

the law of the country to which the processed product is reshipped. Even though most

(Federal Reserve Bank of Dallas, 2002).

Maquila

The Maquila industry is defined as a production activity of assembly shared by

two or more countries. This modality of production generates synergies between

countries; taking advantage from complementary resources such as advanced technology,

low production costs and convenient location. The Maquila industry appeared in Mexico

in the middle sixties, as a source of employment for Mexican workers along the Mexico-

U.S. border region. Many U.S. companies, decided to install assembly plants in the

Mexican border to take advantage from Mexico's cheap labor, advantageous location and

fiscal incentives. The Maquila industry in Mexico was, during the decade of the 90´s, the

Mexican industrial sector of greater growth as for its number of establishments,

production value and employment (Federal Reserve Bank of Dallas, 2002)


Global Financial Crises 65

Mexico

The direct investment in Mexico started in 1989 and up until 1994 was $30,576

millions and from 1995 up until 2003 was $132,767. This indicates the reform attracted

more investors through NAFTA and the maquiladora programs and since the IMF

package will guarantee the investors in case of default. This indicates that direct/ fixed

investment during and after the tequila crisis was far more relevant for the economic

recovery. Because inventories are a flexible component of total investment, so their

variation should be high in periods of crisis. The role of inventories and the contribution

of fixed investment to GDP growth during and after the tequila crisis were tremendous.

Fixed investment averaged a contribution of 2.27% to the average GDP growth of 5.13%,

while inventories contributed only 0.70%.

Moreover, measure of the adequacy of foreign exchange reserves is the ratio of money

assets to foreign reserves. This is well illustrated by the Mexico’s reserves in 1989 which

was $6,740 millions, that will not cover the current account deficit $3,958 in addition to

short-term loans both total $12620 millions. The reserves in 1993 the reserves was

$25,299 millions and the current account deficit was $23,400 millions, and the short-term

loans were $36,257 millions. By adding short-term loans and the deficit will equal

$59,657 millions, this indicates the country financial crisis started well before 1989. This

eventually led to financial crisis and currency devaluation to cover the deficit gap in

addition to other major economic reforms that was induced by IMF. Reference to Mexico

capital inflow, the Mexican interest rate was fluctuating and this might encouraged

investor’s because of high Treasury bill interest rate as high as 103.7% in 1988 and was
Global Financial Crises 66

between 14%-69% between 1989 –1995. The real interest rate for the same period was in

1993 11.2%, 199411.4% and in 199515%.

In addition, according to the data portfolio equity in Mexico started in 1990 $563

millions and eventually increased in 1992 to $5,365 millions; in [1993-$14,297 millions],

in [1994-$4,521 millions] and decreased in [1995-$520 millions], and eventually in

creased in [1996-$3,922 millions] in [1999-$1,129 millions]. Moreover, the direct

investments in Mexico started in 1989 were $3,037 millions, in [1990-$2,634 millions],

in [1994-$10,972 millions] and finally in [2001 $26,204 millions]. This indicates that

investors are effect through NFTA and the maquiladora programs and most of the direct

investment are inventory or re-export trade. Additionally, the data indicates that the

investors invest in Mexico up to 1993 possibly because of the high interest rate. Thus, the

financial crisis of 1994 affected the capital inflows. And eventually the portfolio capital

inflows are gaining momentum in Mexico; it increased from $520 millions in 1995 to
Global Financial Crises 67

$1,129 millions in 1999 (NFTA effect through maquiladora programs).

Trade

180000
160000
140000
120000
Millions of $

100000 Exports (excl. maquila)


80000 Exports (incl. maquila)
60000
40000
20000
0
1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

Year

This indicates that Mexico is gaining investors and foreign capital trust back and the

financial situation is improving and NAFTA plays a tremendous role in this recovery.

Therefore, this illustrates that economy is correlated and intertwined together in global

investment network and the invisible hand as claimed by Adam Smith control this

interactions. Hence, values and economic risk are calculated according to the economic

status quo.
Global Financial Crises 68

Additional examination of Mexican currency devaluation by evaluating the exchange rate

for Mexico, for example, in 1985 the currency was devaluated form [U$/371.7 pesos] to

[1986-U$/ 0.92], in the same time in the black market premium was 6.12%. In 1989 the

currency exchange rate was equal to [2.64 Peso/U$)], and the black market premium was

% 11.13. Moreover, the currency is appreciated again and in [1993- U$/3.105 peso] and

in the black market premium was 1.80%, in 1994 the exchange rate was U$/ 5.35 and

finally in 2001 U$/ 9.14. Hence, this indicates that the economy in turmoil and might not

attract portfolio equities to Mexico because Mexican currency had been devaluated in

1986, this could a sign of financial trouble and possible inflation. Therefore, the portfolio

equity according to the chart started to aim at Mexico in 1990, which was $563 millions

and was growing exponentially in 1993 was $14,297 millions and dropped in 1994 to

$4,521 millions and deficit in 1998 $665 and finally a deficit in 2002 of $104 million.

Furthermore, the Mexican Treasury bill interest rate for the same period was in 1988

103.7%, in 1990 44.99% and in 1994 14.99%, in 1996 48.44%. This indicates that

Mexico was using concretionary monetary policy (raise interest rates and lower income);

and possibly attracted equity portfolio. The real interest rate was nil before 1993. In 1993

was 11.2% in 1994 11.4% and in 1996 4.7% it looks after 1994 that Mexico was applying

expansionary monetary policy (reduce interest rates and raise income) and possibly that

NFTA programs had contributed to this stability.

The Mexican GDP growth rate for the same period 1989 was 1.3% and in [1991-

4.2%], in [1993-2%], in [1994 4.5%], in [1995 -6.2%], in [1996-5.1%], in [1997- 6.8%],

in [1998-4.9%] and declining until finally in 2003 was 1.5%. This indicated that Mexico

economic growth declined during the recovery period (1996/97). Since the GDP in 1993
Global Financial Crises 69

was 2% and the world average was 3.3% indicating that financial crisis on the horizon

and Mexico slow growth might also contributes to the reasoning of crisis on the horizon.

Furthermore, in the pre-tequila period, imports and exports were the most dynamic

components of GDP.

The rate of growth of exports excluding maquiladora in era between (1989-1994) was

$168,479 millions and in the era of (1989-1994) including maquiladora was $277,534

millions; thus the difference is $109,055 millions and this different could be contributed

to the maquiladora affects. In the era of (1995-2000) export excluding maquiladora was

$395,531 and export including the maquiladora $706,191millions and the difference is

$310,660 millions and could also be contributed to the maquiladora programs. On the

other hand, imports excluding maquiladora in the era of (1989-1994) were $148,048 and

import including maquiladora $277,534 millions and the difference is $129,486; this also

could be attributed to the maquiladora programs. In the era of (1995-2000) the imports

excluding maquiladora $395,511 millions and including maquiladora $706,101 and the

difference is $310,590 millions and this also contributed to the maquiladora programs.

Hence, the total of the maquiladora programs form 1989 to 2000 in export sector is

$697,243 millions and the imports for the same period were $440,036. Therefor, the

maquiladora has positive affect on Mexico trade sector. Thus, this sharp rise in the

growth rate of imports reflects the effect of the appreciation of the real exchange rate that

occurred prior to devaluation at the end of 1994 and NAFTA programs played a big role

in both export and import (inventories import and re-export). Moreover, the tequila crises

was sparked by the announcement of a 15% nominal devaluation in December 1994, and

ended with a depreciation of the exchange rate of 43% by March 1995. In those years,
Global Financial Crises 70

there was a rapid growth in imports and exports, which indicates an imbalance of trade

and economic difficulty. During the tequila crises there was an increase in the growth rate

of exports accompanied by a decrease in imports. Both tendencies certainly helped to

cushion the fall of GDP in 1995.

7. Production & Labor

This section consists of two parts; the first part presents a discussion and

assessment of the impact of globalization on the flow of labor within Mexico and the

affect of Maquiladora and Maquila programs, and to assess the impact of globalization on

labor movement and Mexico’s standard of living. Thus, examining the processes by

which globalization impacts an individual country's movement of labor and standard of

living based on my consideration and perspectives on globalization and finally an

assessment on the implications, and consequences of globalization. The second part

regard to international movements of labor and the issue of remittances.

International Movements of Labor and the Issue of Remittances

The international movements of labor and the issue of remittances; the

international movement of labor benefit the recipient countries by means of sending

money from the country where they work to their home country and this considered as

surpluses to the country current account.

For example, countries in the Middle East desire to employ foreign domestic workers e.g.

Saudi Arabia, Qatar, Kuwait, and the U.A.E. They first preferred Arabs, then Muslims,

and if there were further openings workers of other religions. Violations of basic human

rights, abuse, harassment and exploitation are more common in countries of the Middle

East than in countries of Europe or East Asia. Reasons for this situation may be seen in
Global Financial Crises 71

special Socio Political structures, cultural orientations, and lack of familiarity with core

labor standards or the lack of labor standards. Foe example, domestic servants working in

households in these countries encounter treatment ranging from hostility, racism, or

indifference to love and affection. Just as governments in Gulf States countries distance

themselves from guest workers, so housemaids’ sponsors maintain a similar social

distance within households and there is no labor standards for the housemaids. By

separating the maid's living quarters from those of the family, limiting her mobility,

curtailing her socializing, and imposing hard work and discipline, employers create and

reinforce social separations. At the same time, many housemaids work in the same

household for four, eight, or even twelve years at a stretch. Housemaids perform the most

intimate of services for their employers, and some said with evident love and loyalty that

their employers were like a second family. International movement of labor benefits the

recipient country in this case the Gulf countries by supplying labors to their demands,

which here is mutual benefits (Estuarine Research Federation, 2005).

The direct foreign investment benefited the recipient country and how international

movement of labor benefit the recipient country. In this case I have chosen Sudan as an

example of labor and professional export. According to Stalker (1994) Sudan sent large

numbers of emigrants overseas, in total about 500 thousands workers were abroad

including two thirds of the country’s technical and professional workers. In 1985 the

estimated number to be around 500,000, which was 60% of the total national stock of

skilled workers. According to the research the total number of the Sudanese emigrants

was 1,764,000 during the period from 1978 to 1991. The majority of the total Sudanese

emigrants were in Saudi Arabia were 48.3 % and 40% in 1990 and 1996 respectively the
Global Financial Crises 72

labor market policy of Saudi Arabia since the early 19970 gave priority to Arab

applicants for work permits, as the rapid economic growth in the country led to severe

shortages in labor. The national workforce was neither involved in highly professional;

jobs nor in dirty dangerous and physically demanding jobs in the modern sector

development. This increased labor demand in the main receiving countries. Sudan,

therefore, became one of the major supplies of labor. There were approximately (45.2%

and 52%) in 1990 and 1996 respectively of Sudanese emigrants who were working in

neighboring countries, Libya, Iraq, Kuwait, Qatar and United Arab Emirate (Estuarine

Research Federation, 2005).

The following are summary of Sudanese labor migration:

• The majority of Sudanese emigrants are in Saudi Arabia (48.3%).

• The main motive for emigration from Sudan is to find a better job opportunity

75.8%. This achieved through relatives and friends for 48.3% of the

emigrants.

• Emigration involves predominantly males, where 89.3% of them are males and

57.7% of them are in the age group (25-30).

• The educational attainment reflects selectivity of emigration about 42.1% are

secondary certificate and above holders.

• The category of professional, technician’s senior officers and clerks

represented a high percentage.

Moreover, the employment status shows they are employees for 67.9% of the emigrants.

The long list of reasons for Sudanese economy to progress during the last two
Global Financial Crises 73

decades revealed no single cause was sufficient to explain the deterioration and

depression even though the Sudanese foreign worker contribute tremendously to the

Sudan current account. Thus uneven link with global economy handicapped utilization of

the Sudan huge resources of labor. Given the above conditions the average wage as

estimated in 1996 by the ministry of manpower is 66,080 Sudanese pounds, which is

equal to US40. However, 54.4% of the monthly wage labor has salaries less than or equal

to minimum wage that is insufficient to the cost of living in Sudan. On the other hand the

unavailability of adequate jobs with suitable wage cause unemployment among

graduates.

The positive aspects of emigration include remittances, high tax obligations, and

experience and skills gained. Emigrant families are more likely to improve their

dwellings, own assets, and own durable consumer goods.

Emigration policy recommendations include a) Counting emigrants in fertility studies, b)

Programs to tax the income of emigrants' wives, c) Educational policies for the children

of returning emigrants, d) Investment projects directed toward emigrant women, f) Media

campaigns to inform and acculturate emigrants, g) Family planning programs for

emigrants, and making use of emigrants to fund necessary commodities and export

(Estuarine Research Federation, 2005).

Another impact of having Sudanese immigrate legally or illegally to the Saudi

Arabia and the negative effects on the Sudan emigration has led to the loss of a large

number of skilled personnel. This has inflicted a heavy cost on the economy representing

a huge loss of the country’s investment in human capital. The compensation for this loss

of skilled labor has been the remittances that Sudanese workers abroad have sent back to
Global Financial Crises 74

their families. However, there is little evidence that remittances have benefited lower-

income households. According to the results of the 1996 Migration and Labor Force

Survey, 90% of all remittances were sent back by the 62% of emigrants with a secondary

school education or higher. This statistic suggests that remittances are likely to have had a

disequilibrium impact on the distribution of income within Sudan. In addition to

receiving a small share of remittances, low-income households are adversely affected by

the loss of emigrant labor. For example, agricultural households first report mainly a

labor shortage as a result of emigration of a household member. Eventually the main

impact is felt through the constraint. Eventually the main impact is felt through the

constraint placed on cultivating land and the ensuing reduction of production. About 86

per cent of agricultural households reported this constraint as a problem that was

attributable to emigration (Estuarine Research Federation, 2005).

Industrial Development and Employment

Industry has been an anemic generator of employment in Sudan. The share of

industry in GDP fell continuously from the mid 1980s until the mid 1990s. But after the

mid 1990s, industry began to grow. Most of this growth was fuelled by the oil industry

and foreign direct investment and took place in large urban centers such as Khartoum and

Port Sudan. Between 1998 and 2001, industry grew by 10 per cent per year (World Bank,

2003).

Flow of Labor within Mexico

The Mexican economy experienced a sharp contraction in 1995, after the Peso

devaluation of December 22, 1994. The GDP growth rate in 1987 was -3.1%, in [1989-

1.3%], in [1990-4.2%], in [1994-4.5%] and reached rate of -6.2% in 1995, and became
Global Financial Crises 75

positive again during the first quarter of 1996. In 1996 and 1997 the Mexican economy

grew at healthy rates of 5.1% and 6.8% respectively. Thus, the decisive response of the

fiscal and monetary authorities supported by a generous financial package of billions of

dollars announced in March 9, 1995, were crucial for a rapid recovery of lost investor

confidence. These policies prompted a rapid stabilization of the currency and a

turnaround in investment and economic activity.

Furthermore, in 1991,Mexico the U.S. and Canada launched the negotiations over

the terms of the North American Free Trade Agreement (NAFTA). The NAFTA was

officially implemented beginning in January 1, 1994. By the time of the onset of the

tequila, crises most of these trade reforms had been implemented, and none were reversed

as a result of the crises. After Canada, Mexico and the United States adopted NAFTA in

1994, the growth of Mexican maquiladora plants soared. These plants typically import

U.S. inputs, process them and ship them back to the United States. Because maquiladoras

involve U.S.–Mexico trade and their growth acceleration coincided with NAFTA's

inception, many concluded that the trade agreement caused this growth. A maquiladora is

a labor-intensive assembly operation. In its simplest organizational form, a Mexican

maquiladora plant imports inputs from a foreign country—most typically the United

States—processes these inputs and ships them back to the country of origin, sometimes

for more processing and almost surely for marketing (Canada International Trade, 1999).

The direct investment in Mexico started in 1989, which was $3,037 million, in

[1990-$2,634 millions], in [1994-$10,972 millions], in [1995-$9,526 millions], in [1997

$12,831 millions], in [2000-$1,6075 millions], and in [2001-$26,204 millions]. This

indicates the reform attracted more investors through NAFTA and the Maquiladora
Global Financial Crises 76

programs and since the IMF package will guarantee the investors in case of default. This

indicates that direct/ fixed investment during and after the tequila crisis was far more

relevant for the economic recovery. Because inventories are a flexible component of total

investment, so their variation should be high in periods of crisis. The role of inventories

and the contribution of fixed investment to GDP growth during and after the tequila crisis

were tremendous. Fixed investment averaged a contribution of 2.27% to the average GDP

growth of 5.13%, while inventories contributed only 0.70%.

In addition, the Mexican GDP growth rate for the same period 1989 was 1.3%, in 1991,

in [1993-4.2%], in [1993- 2%], in [1994-4.5%], in 1995 was -6.2%, in 1996 5.1%, in

[1997-6.8%], in [1998-4.9%] and declining until finally in 2003 was 1.5%. This indicated

that Mexico economic growth declined during the recovery period (1996/97). Since the

GDP in 1993 was 2% and the world average was 3.3% indicating that financial crisis on

the horizon and Mexico slow growth might also contributes to the reasoning of crisis on

the horizon. Furthermore, in the pre-tequila period, imports and exports were the most

dynamic components of GDP. The rate of growth of exports excluding Maquiladora in

era between (1989-1994) was $168,479 millions and in the era of (1989-1994) including

maquiladora was $277,534 millions; thus the difference is $109,055 millions and this

different could be contributed to the maquiladora affects. In the era of (1995-2000) export

excluding maquiladora was $395,531 and export including the maquiladora

$706,191millions and the difference is $310,660 millions and could also be contributed to

the maquiladora programs. On the other hand, imports excluding maquiladora in the era

of (1989-1994) were $148,048 and import including maquiladora $277,534 millions and

the difference is $129,486; this also could be attributed to the maquiladora programs. In
Global Financial Crises 77

the era of (1995-2000) the imports excluding maquiladora $395,511 millions and

including maquiladora $706,101 and the difference is $310,590 millions and this also

contributed to the maquiladora programs. Hence, the total of the maquiladora programs

form 1989 to 2000 in export sector is $697,243 millions and the imports for the same

period were $440,036.

Therefor, the maquiladora has positive affect on Mexico trade sector. Thus, this sharp rise

in the growth rate of imports reflects the effect of the appreciation of the real exchange

rate that occurred prior to devaluation at the end of 1994 and NAFTA programs played a

big role in both export and import (inventories import and re-export). Moreover, the

tequila crises was sparked by the announcement of a 15% nominal devaluation in

December 1994, and ended with a depreciation of the exchange rate of 43% by March

1995. In those years, there was a rapid growth in imports and exports, which indicates an

imbalance of trade and economic difficulty. During the tequila crises there was an

increase in the growth rate of exports accompanied by a decrease in imports. Both

tendencies certainly helped to cushion the fall of GDP in 1995. Thus, there is no doubt

maquiladoras are an important part of Mexico's international trade picture. Year in and

year out, Maquila plants are responsible for more than 40% of Mexico's exports. Over the

years, with or without NAFTA, the maquiladora industry has grown substantially. During

the five years prior to NAFTA, maquiladora employment grew 47%. But over the first

five years after NAFTA, employment growth soared 86%. This growth was not simply a

matter of existing plants taking on more workers but of rapid expansion in the number of

plants. The 1,789 in-bond plants at the end of 1990 grew to 2,143 at the end of 1993—

just before NAFTA—and to 3,703 by the end of 2000. The acceleration of foreign direct
Global Financial Crises 78

investment under NAFTA also contributed to the creation of more than half-million new

employment opportunities in the U.S.–Mexico border region. For example, NAFTA

allows U.S.–Mexican production-sharing operations in the maquiladora mode but without

the maquiladora program. In any case, if maquiladora production and trade were linked to

NAFTA, their importance for modeling NAFTA's impacts would be markedly different

than if NAFTA did not influence a large portion of U.S.–Mexico trade. Therefore,

globalization would not eliminate the advantages of NAFTA since every country would

be facing the same conditions. For example, if maquiladora activity is not affected by

NAFTA. On the other hand, NAFTA may have encouraged maquiladora expansion by

eliminating all Mexican programs that favored specific industries. NAFTA also

eliminated quotas, which especially impacted the textile industry. NAFTA limits on

Maquiladora domestic sales, which affects the Mexico national economy. But in 2001 the

NAFTA limit on Maquiladora domestic sales was totally relaxed so that, if they so desire,

Maquiladoras are now allowed to sell 100 percent of their production domestically.

Moreover, NAFTA also liberalized trade and investment in the textiles and apparel sector

the Maquiladora industry’s second-largest employer. Moreover, local-content rules in

Mexico’s automotive sector were relaxed to allow treatment of Maquiladoras as national

suppliers for purposes of complying with local-content requirements. Finally, prior to

NAFTA, Maquiladora goods entering the United States were assessed duties on the part

of the good not of U.S. origin. With NAFTA, the value added to Maquiladora output in

Mexico, along with U.S.-origin inputs, is now typically excluded from duties (Federal

Reserve Bank of Dallas, 2002).


Global Financial Crises 79

The maquiladora employment fluctuations are Mexican-to-U.S. and Mexican-to-Asian

manufacturing wage ratios. While the relationship between U.S. industrial production

growth and maquiladora growth is positive, the relationship between these wage ratios

and maquiladora growth is negative. In other words, when Mexican wages increase

relative to foreign wages, Maquila employment growth declines (Federal Reserve Bank

of Dallas, 2003).

The 2001 U.S. recession took a heavy toll on Mexico’s Maquiladora industry. From

October 2000 to June 2002, the industry lost more than 240,000 jobs; plants in Border

States accounted for about 76 percent of these losses. Although the layoffs along the

border have far outweighed those in the interior, the proportions reflect the concentration

of Maquiladora jobs in Border States, which account for about 77% of total Maquiladora

employment. The number of Maquiladora plants has also been affected. Whereas

employment growth turned negative in October 2000, the net number of plants began to

fall a bit later, in mid-2001. From May 2001 to June 2002, about 420 plants closed, three-

fourths of them in Border States. While some media estimates repeat employer assertions

that Maquiladora workers earn as much as $2.00-$2.50 per hour, and compare this to

35¢/hour in China, the actual average Maquiladora wage is generally about $6-8 per day.

Meanwhile, a study by the Economics Faculty of the National Autonomous University in

Mexico City says Mexican wages have lost 81% of their buying power. Twenty years

ago, it says, the minimum wage could pay for 93.5% of a family's basic necessities, while

today it only buys 19.3% (Maquila Portal, 2004).

Foreign firms paying wage according to the study Making The Invisible Visible: A Study

of Maquila Workers in Mexico-2000, in Matamoros, across from Brownsville, Texas, a


Global Financial Crises 80

family of four needs 193.86 pesos a day to reach a sustainable living wage. Based on pay

slips collected from a number of Maquiladora workers, a majority takes home less than

55.55 pesos (approximately US$6.00) a day, which is 28.6% of what a family of four

people, needs to meet its basic needs. One minimum wage salary in Matamoros provides

only 19.6% of what a family of four needs to earn (Maquila Workers, 2003).

Maquiladora Census March 20005:

Number of Plants 2,821


Employment 1,124,586
Direct Labor Wage $ 1.88-Hour
Technicians Wage $ 5.19-Hour
Gross Production $ 91.64 billion
(Maquila Workers, 2003)

The impact of Maquiladora Program's

The impact of Maquiladora program's on labor welfare in Mexico is based on the

fact that the Mexican government has long demonstrated a persistent pattern of failure to

protect the rights of its female manual laborers during Mexico’s struggle to become an

industrialized nation. The Mexican government has allowed foreign investment and the

quest for economic stability to take precedence over the well-being of its own citizens

who work in the Mexican Maquiladora factories. As a result, female Maquiladora has

endured discrimination and marginalization. The maquiladora factories are havens for

foreign investment in Northern Mexico because labor is cheap and plentiful, especially

female labor workers. A direct cause of this is the Mexican government’s willingness to

let women remain the cheapest form of labor by allowing foreign investors to circumvent

the national labor laws that would increase costs. This willingness to look the other way

is compounded by the ineffective prophylactic obligations of the North American Free


Global Financial Crises 81

Trade Agreement (NAFTA) and its labor side agreement, the North American Agreement

on Labor Cooperation (NAALC). The trade agreements fail to fully address the needs and

concerns of female maquiladora workers and fall short of enforcing Mexico’s national

labor laws. “Many critics argue that the maquiladora program is transforming Mexico

into a ‘maquiladora country’ rather than developing a strong Mexican industrial base that

will sustain Mexico’s growth into the future, and that maquiladoras are failing to provide

the technology transfer necessary to develop Mexico’s own national industries.” “Further,

the critics contend, the maquiladora industry is changing Mexico’s value system and

culture and thus profoundly affecting Mexico’s national identity (Nesl Journal, 2004).

The ethical issues and the environmental restrictions may have created another

disincentive to operate under the maquiladora program. In some cases, waste-handling

and treatment regulations were stricter for maquiladoras than for other Mexican plants

making the same products and exporting to the United States. Manufacturing firms'

ability to obtain duty-free benefits under NAFTA without additional cost or

environmental restrictions, which maquila industry membership would impose—could

have encouraged such firms to operate outside the maquiladora program post-NAFTA.

NAFTA also eliminated quotas, which especially impacted the textile industry. With no

constraints on the amount of textiles that could be exported back to the United States,

textile firms may have had an incentive to construct maquila operations in Mexico. Many

observers have concluded that NAFTA's treatment of the textile/apparel sector has

significantly affected the maquila growth in that industry.

Furthermore, the effect of a globally free environment for the movement of labor

in Mexico for example, in the struggle for their rights, women workers confronts various
Global Financial Crises 82

enemies: the foreign boss, the Mexican managers, and the corrupt, "phantom" unions.

These unions not only do not fight for the workers' rights, but the women do not even

know them, have never seen their leaders, and when a conflict arises in a factory,

management informs the workers that "their" unions have accepted these or those

conditions. One example of a "phantom" union is the Confederation Regional de Obreros

Mexicanos (CROM), or Regional Confederation of Mexican Workers. In Baja California,

the CROM sells labor protection directly to the companies. The CROM makes deals

about working conditions and salaries with management without the workers' knowledge.

In return it receives union fees deducted from the payroll directly from management.

Obviously, the government and companies prefer this model of union organization. The

CROM uses similar tactics to the Confederacion de Trabajadores Mexicanos (CTM, or

Confederation of Mexican Workers), which also claims to represent maquila workers. In

Tamaulipas the CTM was forced by the movement of women workers of maquila to

subscribe to Internal Rules of Work providing for the minimum salary established by the

Federal Labor Law, even though it is not firms guarantee that these minimums are met

(Valadez, C and Cota, G, 2002).

8. International Monetary Fund

IMF Bailouts

According to the Economist, April 23rd 2005, the trade balance is a deficit of $0.9

billions and the current account equal to $4.5 billions and the foreign reserve equal to

$48.5 billions. Hence, these reforms might have assisted Thailand financial recovery, but

still, the IMF reforms were aimed at the foreign investors. IMF reforms as explained by

Michel Chossudovsky professor of economics, at University of Ottawa: The


Global Financial Crises 83

appropriation of global wealth through this manipulation of market forces is routinely

supported by the IMF's lethal macro-economic interventions which act almost

concurrently in ruthlessly disrupting national economies all over the World. In Korea,

Indonesia and Thailand, institutional speculators pillaged the vaults of the central banks

while the monetary authorities sought in vain to prop up their ailing currencies. World's

largest merchant banks including: Lehman Brothers; Credit Suisse-First Boston,

Goldman Sachs and UBS/SBC Warburg Dillon Read. The World's largest money

managers set countries on fire and are then called in as firemen (under the IMF "rescue

plan") to extinguish the blaze. They ultimately decide which enterprises are to be closed

down and which are to be auctioned off to foreign investors at bargain prices. The IMF

Bailouts funds:

• Under repeated speculative assaults, Asian central banks had entered into multi-

billion dollar contracts (in the forward foreign exchange market) in a vain attempt

to protect their currency. With the total depletion of their hard currency reserves,

the monetary authorities were forced to borrow large amounts of money under the

IMF bailout agreement.

• In other words, those who guarantee the issuing of public debt (to finance the

bailout) are those who will ultimately appropriate the loot e.g. as creditors of

Korea or Thailand such as they are the ultimate recipients of the bailout money

(which essentially constitutes a "safety net" for the institutional speculator). The

vast amounts of money granted under the rescue packages are intended to enable

the Asian countries meet their debt obligations with those same financial

institutions; which contributed to precipitating the breakdown of their national


Global Financial Crises 84

currencies in the first place. As a result of this vicious circle, a handful of

commercial banks and brokerage houses have enriched themselves beyond

bounds; they have also increased their stranglehold over governments and

politicians around the World.

• Since the 1994-95 Mexican crisis, the IMF has played a crucial role in shaping the

"financial environment" in which the global banks and money managers wage

their speculative raids. The global banks are craving for access to inside

information. Successful speculative attacks require the concurrent implementation

on their behalf of "strong economic medicine" under the IMF bailout agreements.

The "big six" Wall Street commercial banks (including Chase, Bank America,

Citicorp and J. P. Morgan) and the "big five" merchant banks (Goldman Sachs,

Lehman Brothers, Morgan Stanley and Salomon Smith Barney) were consulted

on the clauses to be included in the bailout agreements. In the case of Korea's

short-term debt, Wall Street's largest financial institutions were called in on

Christmas Eve (24 December 1997), for high level talks at the Federal Reserve

Bank of New York.14 (Chossudovsky, 2003)

Globalization and Capital Flows

Globalization expands and accelerates the movement and exchange of ideas and

commodities over vast distances. It is common to discuss the phenomenon from an

abstract, global perspective, but in fact globalization's most important impacts are often

highly localized. This section explores the various manifestations of interconnectedness

in the world, noting how globalization affects real people and places. But while Mexico

benefited in the early days, especially with exports from factories near the United States
Global Financial Crises 85

border, those benefits have waned, both with the weakening of the American economy

and intense competition from China. Meanwhile, poor Mexican corn farmers face an

uphill battle competing with highly subsidized American corn, while relatively better-off

Mexican city dwellers benefit from lower corn prices. And as all but one of Mexico's

major banks have been sold to foreign banks, local small- and medium-sized enterprises

particularly in non-export sectors like small retail and worry about access to credit.

Growth in Mexico over the past 10 years has been a bleak 1 percent on a per capita basis,

which is better than in much of the rest of Latin America, but far poorer than earlier in the

century. From 1948 to 1973, Mexico grew at an average annual rate of 3.2 percent per

capita; by contrast, in the 10 years of NAFTA, even with the East Asian crisis, Korean

growth averaged 4.3 percent and China's 7 percent in per capita terms. These outcomes

should not have come as a surprise. NAFTA does give Mexico a slight advantage over

other trading partners. But with its low tax base, low investment in education and

technology, and high inequality, Mexico would have a hard time competing with a

dynamic China. NAFTA enhanced Mexico's ability to supply American manufacturing

firms with low-cost parts, but it did not make Mexico into an independently productive

economy (Stiglitz, 2002). Additionally, NAFTA began in 1994 for Canada the United

States and Mexico, there were more than few skeptics. Six years later, the figures speak

for themselves: total merchandise trade across North America surpassed $752 billions in

1998. Canada’s merchandise trade with Mexico doubled over the same period, reaching

$9 billion a year. In the last four years an estimated 1.5 million new jobs have been

created in Mexico alone. Since NAFTA there were 15,883 New Mexican export firms

created. Throughout history, adventurers, generals, merchants, and financiers have


Global Financial Crises 86

constructed an ever-more-global economy. Today, unprecedented changes in

communications, transportation, and computer technology have given the process new

impetus. As globally mobile capital reorganizes business firms, it sweeps away regulation

and undermines local and national politics. Globalization creates new markets and

wealth, even as it causes widespread suffering, disorder, and unrest. It is both a source of

repression and a catalyst for global movements of social justice and emancipation. These

materials look at the main features of globalization, asking what is new, what drives the

process, how it changes politics, and how it affects global institutions like the UN

(Stiglitz, 2004).

Furthermore, globalization advantages are advances in communication and

transportation technology, combined with free-market ideology, have given goods,

services, and capital unprecedented mobility. Northern countries want to open world

markets to their goods and take advantage of abundant, cheap labor in the South,

policies often supported by Southern elites (few people that disregard human parity and

they advance themselves not the people). They use international financial institutions

and regional trade agreements to compel poor countries to "integrate" by reducing

tariffs, privatizing state enterprises, and relaxing environmental and labor standards. The

results have enlarged profits for investors but offered pittances to laborers, provoking a

strong backlash from civil society. This was obviously demonstrated by the IMF bailouts

and reforms that was initiated, first to pay investors (North institutions) and undermined

these nations actual recovery. Thus, WTO and the IMF in their effort of economic

globalization should concentrate and promote sustainable development in the South.


Global Financial Crises 87

Because if the North neglected this issue; the problem will still exist and unfortunately it

will grow exponentially and eventually affect the North.

Globalization and Economy

Advances in communication and transportation technology, combined with free-market

ideology, have given goods, services, and capital unprecedented mobility. Northern

countries want to open world markets to their goods and take advantage of abundant,

cheap labor in the South, policies often supported by Southern elites. They use

international financial institutions and regional trade agreements to compel poor countries

to "integrate" by reducing tariffs, privatizing state enterprises, and relaxing environmental

and labor standards. The results have enlarged profits for investors but offered pittances

to laborers, provoking a strong backlash from civil society. The following section will

analyze economic and globalization, and examines how it might be resisted or regulated

in order to promote sustainable development i.e. Mexico. For example, in 1982,

Mexican economical development had accumulated a US$8 billion backlog in payments

on its external public debt and faced the prospect of another US$14 billion accumulating

over the next three years. Domestic demand was reduced as a result of the sharp drop in

real wages: between 1982 and 1987, 45 and 40 percent reduced minimum and contractual

wages, respectively, in real terms. The decline in international oil prices in 1986 and the

collapse of the Mexican stock market in 1987 wiped out all hopes of recovery, and the

government began its quest for a new adjustment program. The Mexican government

appealed to the IMF for assistance. After consultations, an Enhanced Fund Facility

totaling US$3.9 billion, equivalent to 450 percent of Mexico's IMF quota, was approved.

The stated objectives of the three-year package were to assist in reducing the external
Global Financial Crises 88

deficit, control inflation, restart the growth process, increase employment and lower the

fiscal deficit. A restrictive monetary policy was to be adopted in order to maintain price

stability. The exchange rate would be adjusted and exchange controls were to be replaced

by a dual-exchange-rate system. In addition, the fiscal deficit would have to be cut from

8.5 to 5.5% of GDP. The IMF corresponded by supporting the renegotiation of US$23

billion of Mexico's foreign debt, the extension of amortization terms from six to ten

years, and the reduction of interest rates from 2.25 points to 1.5 over the London Inter-

bank Offer Rate (Libor), and from 2.2 to 1.2 points over the U.S. prime rate. In 1985, the

third year of the agreement, the fall in oil prices translated into renewed difficulties and

additional pressure on Mexico's balance-of-payments position. The Mexico City

earthquake further aggravated the economic situation. During 1986, the Mexican

economy was subjected to another serious external shock as oil prices plummeted.

Foregone income due to the depressed prices amounted to more than US$11 billion or six

percent of GDP. In 1985, the third year of the agreement, the fall in oil prices translated

into renewed difficulties and additional pressure on Mexico's balance-of-payments

position. The Mexico City earthquake further aggravated the economic situation. During

1986, the Mexican economy was subjected to another serious external shock as oil prices

plummeted. Foregone income due to the depressed prices amounted to more than US$11

billion or six percent of GDP. The government once again appealed to the IMF, and an

agreement was signed providing emergency support for an amount equivalent to 1.4

billion in Special Drawing Rights (SDRs). In 1989 a new agreement was reached with the

IMF for credits of 2.7 billion SDRs (equivalent to US$3.6 billion), to be used in part for

the servicing of rescheduled external debt. Once again, the objective of the agreement
Global Financial Crises 89

was to attempt to restart growth and generate employment, as well as to reduce inflation

to 18 percent. Between 1990 and 1994, Mexico increasingly relied on short-term capital

inflows to finance its current-account deficit, and there was no need for other agreements

with the IMF. The trade deficit was responsible for 65 percent of the current-account

imbalance (US$29662 billion). Capital flows ceased after the first quarter of 1994,

reserves from $25299 billion in 1993 to $6441 billion in 1994. High interest rates were

offered as a risk premium, but when portfolio investments failed to materialize,

protection was added against exchange-rate changes by dollar-denominating US$28

billion in Treasury bills (Tesobonos) (Nadal, 2002)

Globalization of Politics

Globalization of politics, traditionally politics has been undertaken within national

political systems. National governments have been ultimately responsible for maintaining

the security and economic welfare of their citizens, as well as the protection of human

rights and the environment within their borders. With global ecological changes, an ever

more integrated global economy, and other global trends; political activity increasingly

takes place at the global level. Under globalization, politics can take place above the state

through political integration schemes such as the European Union and through

intergovernmental organizations such as the International Monetary Fund, the World

Bank and the World Trade Organization. Political activity can also transcend national

borders through global movements and NGOs. Civil society organizations act globally by

forming alliances with organizations in other countries, using global communications

systems, and lobbying international organizations and other actors directly, instead of

working through their national governments. Hence, if we examine this point from the
Global Financial Crises 90

corrupt civil services and governments in the South, the global environment might assist

the South to implement new measures and adapt government that will promote the

interest of their people i.e. environment. Therefore, globalization which has played out in

this country around clashes over the North America Free Trade Agreement (NAFTA), the

World Trade Organization (WTO), and most recently trade status for China, is not just

about trade. Corporations are not only moving goods across borders—they are also

moving capital, factories, and jobs. The fight is not just about tariffs but all kinds of laws

protecting labor, defending the environment. Globalization is also threatening many

useful public services with private corporations demanding the right to obtain Social

Security, schools, airports, prisons, transit systems—and even our drinking water. Hence,

the impact on U.S. workers has been far greater than the several hundred thousand jobs

that have been directly lost to “free trade.” The mere threat by bosses to relocate jobs has

had a chilling effect on labor relations. Workers displaced by job movement have taken a

cut in wages and benefits while most other workers, wary of relocation threats, have

settled for stagnant wages—even in the midst of what is supposed to be unprecedented

prosperity. Thus, if globalization prevails the living standards of working people

everywhere will be driven down to the lowest level anywhere. The only effective defense

is to promote workers standards everywhere through organization and solidarity. In

addition, an important issue the environment protection in correlation with globalization

The U.S. labor movement has made great progress in understanding globalization and

taking initiatives to fight it (Kclabor, 2003).

According to Michel Chossudovsky professor of economics, at University of Ottawa

explains how IMF reform and globalization affect the South “Following a scheme
Global Financial Crises 91

devised during the Mexican crisis of 1994-95, the bailout money, however, is not

intended "to rescue the country"; in fact the money never entered Korea, Thailand or

Indonesia; it was earmarked to reimburse the "institutional speculators", to ensure that

they would be able to collect their multi-billion dollar loot. In turn, the Asian tigers have

being tamed by their financial masters. Transformed into lame ducks-- they have been

"locked up" into servicing these massive dollar denominated debts well into the third

millennium. To finance these multi-billion dollar operations, only a small portion of the

money comes from IMF resources: starting with the Mexican 1995 bail-out, G7 countries

including the US Treasury were called upon to make large lump-sum contributions to

these IMF sponsored rescue operations leading to significant hikes in the levels of public

debt. Yet in an ironic twist, the issuing of US public debt to finance the bailouts is

underwritten and guaranteed by the same group of Wall Street merchant banks involved

in the speculative assaults (Chossudovsky, 2003).


Global Financial Crises 92

Business Week (2002)

9. Conclusion

On conclusion, first, the portfolio capital during the 1990s the lending boom in

Thailand was 58% comparing to Mexico and the ‘Tequila effect’ countries, between 1990

and 1994 the lending boom in Mexico 116%. In Thailand the lending boom was

significantly larger for finance and securities companies was 133%. By 1997, non-

performing loans of local banks in Thailand were 15%. Asset deflation and the sharp drop

in the value of the collateral especially real estate triggered the irreversible surge in the

share of non-performing loans (Corestti, et al, 1998).


Global Financial Crises 93

Country may suffer a short-run liquidity problem when available stock of reserves is low

relative to the overall burden of external debt services (interest payment plus renewal of a

loans coming to maturity) Liquidity problems emerge when panicking external creditors

—perhaps in response to rapid devaluation—become unwilling to role over existing

short-term credit. If a large fraction of a country’s external liabilities are short-term, a

crisis may take a form of pure liquidity shortfall. Hence, the inability by country to roll

over its short-term liabilities for example the experience of Mexico with its short-term

public debit (p. 30), which is analogues of had happened in Thailand, Mexico and

Argentina banking system.

In 1999 the per capita growth rate in Thailand 3.33%, Mexico 1.737% and Argentina

-4.66%, by contrast to 1997, Mexico 3.38%, Thailand 4.8% and Argentina 4.18%. This

indicates the economy still staggering in theses nations.

Therefore, these countries total debit, for example in Thailand in 1997 was $109,669

millions, Mexico in 1997 $147,632 millions and in Argentina in $128,411 millions. By

contrast the balance on the current account in 1997 for Thailand was a deficit of $3,021

millions, Mexico deficit of $7454 millions, and Argentina deficit $12,344. This indicates

the unbalance between debit and current account balances, which might indicate financial

problem on the horizon and might influence currency exchange rate and inflows of

portfolio equities.

The IMF bailouts and the crises in Latin America, Asia, and elsewhere have occurred

because of flawed domestic policies and economics culture. Bailouts by the IMF or the

U.S. Treasury only encourage further crises and aggravate current ones. The similarities

between the remedy or IMF reforms are obvious in IMF agendas and polices. IMF
Global Financial Crises 94

required from these government to follow certain pattern, i.e. privatization, and free

foreign trade barriers, law and tariffs reform and so on. But these economic culture and

situations mentioned above varies in their contexts and implementations. Hence,

willingness that IMF microeconomic reforms will be followed is unknown and what are

the real economic barriers beside economic infrastructure and bureaucracy in civil service

sector. I presumed that IMF executives forgot to bear in mind these economies are not in

equilibrium and economic infrastructures are at minimal and the existence of corruptions

and bureaucracies in the civil services sectors in these nations. Therefore, the economy

mal function caused the currency to be devaluated and appreciated that make cost of

living increase sometimes by 1000% in some case. Therefore, the problem is deep than

the IMF considers. Healthier and successful economy need economic infrastructure and

needs cadres to be able to run such economy. These nation lack complete economic

infrastructure and the working force is not balanced. However, most IMF reforms were

directed to attempts to alleviate poverty in these nations but, to alleviate poverty, these

nation first need economic infrastructure and ability to minimize the corruptions and

bureaucracies practices in civil services sector and formal structure to the education

system. By contrasting these economies with portfolio capital inflow discussion. During

the 1990s the lending boom in Thailand was 58% comparing to Mexico and the ‘Tequila

effect’ countries, between 1990 and 1994 the lending boom in Mexico 116%. In Thailand

the lending boom was significantly larger for finance and securities companies was

133%. By 1997, non-performing loans of local banks in Thailand were 15%. Asset

deflation and the sharp drop in the value of the collateral especially real estate triggered

the irreversible surge in the share of non-performing loans (p. 28).


Global Financial Crises 95

Hence, the IMF reforms were in process in these nations and the real problem was not

addressed. For example, economic infrastructure, technology, education, health, among

many things that under developing countries required before the economy can speed up

or implemented correctly. The following are summary for theses countries problems:

• Argentina problem started well before the 2001 financial crisis. The government

spending at state and federal levels has increased from 38.9 percent of gross

domestic product to 49.4% since 1997. Hence, IMF introduced reforms and

financial assistance might work well if Argentina adapts feasible macroeconomic

strategy. The Argentine economy has performed poorly since 1995, growing at an

annual rate of 1 percent per capita on average. There are two reasons for that poor

performance. Argentina has one of the most regulated labor markets in the world.

Those rules make it difficult and costly for employers to dismiss workers, so

companies don't hire workers in the first place. Not surprisingly, the rate of

unemployment in Argentina has hovered around 15 percent since 1995. The rate

of underemployment (the percentage of the labor force working less than 35 hours

per week but wishing to work more) is also around 15%.

• Thailand problem was prior to 1997 financial crisis, for example external

developments problem, and weakness in financial and corporate systems. The

external imbalances were a reflection both of strong private capital inflows and of

high domestic private investment rates, and were exacerbated, prior to the crisis,

by appreciation of the U.S. dollar to which the currencies of the countries

concerned were formally or informally pegged.


Global Financial Crises 96

• By 1982, Mexico had accumulated a US$8 billion backlog in payments on its

external public debt and faced the prospect of another US$14 billion

accumulating over the next three years (Cato Institute, 2001).

The global financial crisis in Asia and South America; during the 1990s the lending

boom in Thailand was 58% comparing to Mexico and the ‘Tequila effect’ countries,

between 1990 and 1994 the lending boom in Mexico 116%. In Thailand the lending

boom was significantly larger for finance and securities companies was (133%). By 1997,

non-performing loans of local banks in Thailand were 15%. Asset deflation and the sharp

drop in the value of the collateral especially real estate triggered the irreversible surge in

the share of non-performing loans (Corestti, et al. 1998).

Reference to the financial crisis and the contagion effects, during the 1990s the

lending boom in Thailand was 58% comparing to Mexico and the ‘Tequila effect’

countries, between 1990 and 1994 the lending boom in Mexico 116%. In Thailand the

lending boom was significantly larger for finance and securities companies was 133%.

By 1997, non-performing loans of local banks in Thailand were 15%. Asset deflation and

the sharp drop in the value of the collateral especially real estate triggered the irreversible

surge in the share of non-performing loans (Corestti, et, al. 1998).

Country may suffer a short-run liquidity problem when available stock of reserves is low

relative to the overall burden of external debt services (interest payment plus renewal of a

loans coming to maturity) Liquidity problems emerge when panicking external creditors

—perhaps in response to rapid devaluation—become unwilling to role over existing

short-term credit. If a large fraction of a country’s external liabilities are short-term, a

crisis may take a form of pure liquidity shortfall. Hence, the inability by country to roll
Global Financial Crises 97

over its short-term liabilities for example the experience of Mexico with its short-term

public debit that is analogues of had happened in Thailand, Mexico and Argentina

banking system.

Country may suffer a short-run liquidity problem when available stock of reserves is low

relative to the overall burden of external debt services (interest payment plus renewal of a

loans coming to maturity) Liquidity problems emerge when panicking external creditors

—perhaps in response to rapid devaluation—become unwilling to role over existing

short-term credit. If a large fraction of a country’s external liabilities are short-term, a

crisis may take a form of pure liquidity shortfall. Hence, the inability by country to roll

over its short-term liabilities for example the experience of Mexico with its short-term

public debit (p. 30), which is analogues of had happened in Thailand, Mexico and

Argentina banking system. In 1999 the per capita growth rate in Thailand 3.33%, Mexico

1.737% and Argentina -4.66%, by contrast to 1997, Mexico 3.38%, Thailand 4.8% and

Argentina 4.18%. This indicates the economy still staggering in theses nations. Therefore,

these countries total debit, for example in Thailand in 1997 was $109,669 millions,

Mexico in 1997 $147,632 millions and in Argentina in $128,411 millions. By contrast the

balance on the current account in 1997 for Thailand was a deficit of $3021 millions,

Mexico deficit of $7,454 millions, and Argentina deficit $12,344. This indicates the

unbalance between debit and current account balances, which might indicate financial

problem on the horizon and might influence currency exchange rate and inflows of

portfolio equities.

The IMF bailouts and the crises in Latin America, Asia, and elsewhere have occurred

because of flawed domestic policies and economics culture. Bailouts by the IMF or the
Global Financial Crises 98

U.S. Treasury only encourage further crises and aggravate current ones. The similarities

between the remedy or IMF reforms are obvious in IMF agendas and polices. IMF

required from these government to follow certain pattern, i.e. privatization, and free

foreign trade barriers, law and tariffs reform and so on. But these economic culture and

situations mentioned above varies in their contexts and implementations. Hence,

willingness that IMF microeconomic reforms will be followed is unknown and what are

the real economic barriers beside economic infrastructure and bureaucracy in civil service

sector. In 1999 the per capita growth rate in Thailand 3.33%, Mexico 1.737% and

Argentina -4.66%, by contrast to 1997, Mexico 3.38%, Thailand 4.8% and Argentina

4.18%. This indicates the economy still staggering in theses nations.

I presumed that IMF executives forgot to bear in mind these economies are not in

equilibrium and economic infrastructures are at minimal and the existence of corruptions

and bureaucracies in the civil services sectors in these nations. Therefore, the economy

mal function caused the currency to be devaluated and appreciated that make cost of

living increase sometimes by 1000% in some case. Therefore, the problem is deep than

the IMF considers. Healthier and successful economy need economic infrastructure and

needs cadres to be able to run such economy. These nation lack complete economic

infrastructure and the working force is not balanced. However, most IMF reforms were

directed to attempts to alleviate poverty in these nations but, to alleviate poverty, these

nation first need economic infrastructure and ability to minimize the corruptions and

bureaucracies practices in civil services sector and formal structure to the education

system. By contrasting these economies with portfolio capital inflow discussion. During

the 1990s the lending boom in Thailand was 58% comparing to Mexico and the ‘Tequila
Global Financial Crises 99

effect’ countries, between 1990 and 1994 the lending boom in Mexico 116%. In Thailand

the lending boom was significantly larger for finance and securities companies was

133%. By 1997, non-performing loans of local banks in Thailand were 15%. Asset

deflation and the sharp drop in the value of the collateral especially real estate triggered

the irreversible surge in the share of non-performing loans (Corestti et al., 1998).

Country may suffer a short-run liquidity problem when available stock of reserves is low

relative to the overall burden of external debt services (interest payment plus renewal of a

loans coming to maturity) Liquidity problems emerge when panicking external creditors

—perhaps in response to rapid devaluation—become unwilling to role over existing

short-term credit. If a large fraction of a country’s external liabilities are short-term, a

crisis may take a form of pure liquidity shortfall. Hence, the inability by country to roll

over its short-term liabilities for example the experience of Mexico with its short-term

public debit (p. 30), which is analogues of what had happened in Thailand, and Argentina

banking system. In 1999 the per capita growth rate in Thailand 3.33%, Mexico 1.737%

and Argentina was -4.66%, by contrast to 1997, in Mexico was 3.38%, Thailand 4.8%

and Argentina 4.18%. This indicates the economy still staggering in theses nations.

Therefore, these countries total debit, for example in Thailand in 1997 was $109,669

millions, Mexico in 1997 $147,632 millions and in Argentina in $128,411 millions. By

contrast the balance on the current account in 1997 for Thailand was a deficit of $3,021

millions, Mexico deficit of $7,454 millions, and Argentina deficit $12,344. This indicates

the unbalance between debit and current account balances, which might indicate financial

problem on the horizon and might influence currency exchange rate and inflows of

portfolio equities. Hence, the IMF reforms were in process in these nations and the real
Global Financial Crises 100

problem was not addressed. For example, economic infrastructure, technology, education,

health, among many things that under developing countries required before the economy

can speed up or implemented correctly. The following are summary for theses countries

problems:

• Argentina problem started well before the 2001 financial crisis. The government

spending at state and federal levels has increased from 38.9 percent of gross

domestic product to 49.4% since 1997. Hence, IMF introduced reforms and

financial assistance might work well if Argentina adapts feasible macroeconomic

strategy. The Argentine economy has performed poorly since 1995, growing at an

annual rate of 1 percent per capita on average. There are two reasons for that poor

performance. Argentina has one of the most regulated labor markets in the world.

Those rules make it difficult and costly for employers to dismiss workers, so

companies don't hire workers in the first place. Not surprisingly, the rate of

unemployment in Argentina has hovered around 15 percent since 1995. The rate

of underemployment (the percentage of the labor force working less than 35 hours

per week but wishing to work more) is also around 15%.

• Thailand problem was prior to 1997 financial crisis, for example external

developments problem, and weakness in financial and corporate systems. The

external imbalances were a reflection both of strong private capital inflows and of

high domestic private investment rates, and were exacerbated, prior to the crisis,

by appreciation of the U.S. dollar to which the currencies of the countries

concerned were formally or informally pegged.


Global Financial Crises 101

• By 1982, Mexico had accumulated a US$8 billion backlog in payments on its

external public debt and faced the prospect of another US$14 billion

accumulating over the next three years (Cato Institute, 2001).

The global financial crisis in Asia and South America; during the 1990s the lending

boom in Thailand was 58% comparing to Mexico and the ‘Tequila effect’ countries,

between 1990 and 1994 the lending boom in Mexico 116%. In Thailand the lending

boom was significantly larger for finance and securities companies was (133%). By 1997,

non-performing loans of local banks in Thailand were 15%. Asset deflation and the sharp

drop in the value of the collateral especially real estate triggered the irreversible surge in

the share of non-performing loans (p. 28).

Country may suffer a short-run liquidity problem when available stock of reserves is low

relative to the overall burden of external debt services (interest payment plus renewal of a

loans coming to maturity) Liquidity problems emerge when panicking external creditors

—perhaps in response to rapid devaluation—become unwilling to role over existing

short-term credit. If a large fraction of a country’s external liabilities are short-term, a

crisis may take a form of pure liquidity shortfall. Hence, the inability by country to roll

over its short-term liabilities for example the experience of Mexico with its short-term

public debit that is analogues of had happened in Thailand, Mexico and Argentina

banking system.

In 1999 the per capita growth rate in Thailand was 3.33%, in Mexico was 1.737% and

Argentina was -4.66%, by contrast to 1997, Mexico was 3.38%, Thailand was 4.8% and

Argentina was 4.18%. This indicates the economy still staggering in theses nations.

Therefore, these countries total debit, for example in Thailand in 1997 was $109,669
Global Financial Crises 102

millions, Mexico in 1997 $147,632 millions and in Argentina in $128,411 millions. By

contrast the balance on the current account in 1997 for Thailand was a deficit of $3,021

millions, Mexico deficit of $7,454 millions, and Argentina deficit $12,344. This indicates

the imbalance between debit and current account balances and reserves, which might

indicate financial problem on the horizon and might influence currency exchange rate and

inflows of portfolio equities.

Reference to the financial crisis and the contagion effects, during the 1990s the

lending boom in Thailand was 58% comparing to Mexico and the ‘Tequila effect’

countries between 1990 and 1994 the lending boom in Mexico 116%. In Thailand the

lending boom was significantly larger for finance and securities companies was 133%.

By 1997, non-performing loans of local banks in Thailand were 15%. Asset deflation and

the sharp drop in the value of the collateral especially real estate triggered the irreversible

surge in the share of non-performing loans (p. 30).

Country may suffer a short-run liquidity problem when available stock of reserves is low

relative to the overall burden of external debt services (interest payment plus renewal of a

loans coming to maturity) Liquidity problems emerge when panicking external creditors

—perhaps in response to rapid devaluation—become unwilling to role over existing

short-term credit. If a large fraction of a country’s external liabilities are short-term, a

crisis may take a form of pure liquidity shortfall. Hence, the inability by country to roll

over its short-term liabilities for example the experience of Mexico with its short-term

public debit that is analogues of had happened in Thailand, Mexico and Argentina

banking system. In 1999 the per capita growth rate in Thailand 3.33%, Mexico 1.737%
Global Financial Crises 103

and Argentina -4.66%, by contrast to 1997, Mexico 3.38%, Thailand 4.8% and Argentina

4.18%. This indicates the economy still staggering in theses nations.

Therefore, these countries total debit, for example in Thailand in 1997 was $109669

millions, Mexico in 1997 $147,632 millions and in Argentina in $128,411 millions. By

contrast the balance on the current account in 1997 for Thailand was a deficit of $3,021

millions, Mexico deficit of $7,454 millions, and Argentina deficit $12,344. This indicates

the imbalance between debit and current account balances and reserves, which might

indicate financial problem on the horizon and might influence currency exchange rate and

inflows of portfolio equities.

Moral hazard in financial institutions as explained by Michel Chossudovsky

professor of economics, at University of Ottawa: The appropriation of global wealth

through this manipulation of market forces is routinely supported by the IMF's lethal

macro-economic interventions which act almost concurrently in ruthlessly disrupting

national economies all over the World.. In Korea, Indonesia and Thailand, institutional

speculators pillaged the vaults of the central banks while the monetary authorities sought

in vain to prop up their ailing currencies. World's largest merchant banks including:

Lehman Brothers; Credit Suisse-First Boston, Goldman Sachs and UBS/SBC Warburg

Dillon Read. The World's largest money managers set countries on fire and are then

called in as firemen under the IMF rescue plan to extinguish the blaze. They ultimately

decide which enterprises are to be closed down and which are to be auctioned off to

foreign investors at bargain prices.


Global Financial Crises 104

The IMF Bailouts funds:

• Under repeated speculative assaults, Asian central banks had entered into multi-

billion dollar contracts (in the forward foreign exchange market) in a vain attempt

to protect their currency. With the total depletion of their hard currency reserves,

the monetary authorities were forced to borrow large amounts of money under the

IMF bailout agreement.

• Following a scheme devised during the Mexican crisis of 1994-95, the bailout

money, however, is not intended "to rescue the country"; in fact the money never

entered Korea, Thailand or Indonesia; it was earmarked to reimburse the

"institutional speculators", to ensure that they would be able to collect their multi-

billion dollar loot. In turn, the Asian tigers have being tamed by their financial

masters. Transformed into lame ducks-- they have been "locked up" into servicing

these massive dollar denominated debts well into the third millennium.

• To finance these multi-billion dollar operations, only a small portion of the

money comes from IMF resources: starting with the Mexican 1995 bail-out, G7

countries including the US Treasury were called upon to make large lump-sum

contributions to these IMF sponsored rescue operations leading to significant

hikes in the levels of public debt. Yet in an ironic twist, the issuing of US public

debt to finance the bailouts is underwritten and guaranteed by the same group of

Wall Street merchant banks involved in the speculative assaults.

• In other words, those who guarantee the issuing of public debt (to finance the

bailout) are those who will ultimately appropriate the loot e.g. as creditors of

Korea or Thailand such as they are the ultimate recipients of the bailout money
Global Financial Crises 105

(which essentially constitutes a "safety net" for the institutional speculator). The

vast amounts of money granted under the rescue packages are intended to enable

the Asian countries meet their debt obligations with those same financial

institutions; which contributed to precipitating the breakdown of their national

currencies in the first place. As a result of this vicious circle, a handful of

commercial banks and brokerage houses have enriched themselves beyond

bounds; they have also increased their stranglehold over governments and

politicians around the World.

• Since the 1994-95 Mexican crisis, the IMF has played a crucial role in shaping the

"financial environment" in which the global banks and money managers wage

their speculative raids. The global banks are craving for access to inside

information. Successful speculative attacks require the concurrent implementation

on their behalf of "strong economic medicine" under the IMF bailout agreements.

The "big six" Wall Street commercial banks (including Chase, Bank America,

Citicorp and J. P. Morgan) and the "big five" merchant banks (Goldman Sachs,

Lehman Brothers, Morgan Stanley and Salomon Smith Barney) were consulted

on the clauses to be included in the bailout agreements. In the case of Korea's

short-term debt, Wall Street's largest financial institutions were called in on

Christmas Eve (24 December 1997), for high level talks at the Federal Reserve

Bank of New York.14 (Chossudovsky, 2003)

There is no doubt maquiladoras are an important part of Mexico's international

trade picture. Year in and year out, maquila plants are responsible for more than 40% of

Mexico's exports. Over the years, with or without NAFTA, the maquiladora industry has
Global Financial Crises 106

grown substantially. During the five years prior to NAFTA, maquiladora employment

grew 47%. But over the first five years after NAFTA, employment growth soared 86%.

This growth was not simply a matter of existing plants taking on more workers but of

rapid expansion in the number of plants. The 1,789 in-bond plants at the end of 1990

grew to 2,143 at the end of 1993—just before NAFTA—and to 3,703 by the end of 2000.

The acceleration of foreign direct investment under NAFTA also contributed to the

creation of more than half-million new employment opportunities in the U.S.–Mexico

border region. For example, NAFTA allows U.S.–Mexican production-sharing operations

in the maquiladora mode but without the maquiladora program. In any case, if

maquiladora production and trade were linked to NAFTA, their importance for modeling

NAFTA's impacts would be markedly different than if NAFTA did not influence a large

portion of U.S.–Mexico trade. Therefore, globalization would not eliminate the

advantages of NAFTA since every country would be facing the same conditions. For

example, if maquiladora activity is not affected by NAFTA. On the other hand, NAFTA

may have encouraged maquiladora expansion by eliminating all Mexican programs that

favored specific industries. NAFTA also eliminated quotas, which especially impacted

the textile industry. NAFTA limits on maquiladora domestic sales, which affects the

Mexico national economy. But in 2001 the NAFTA limit on maquiladora domestic sales

was totally relaxed so that, if they so desire, maquiladoras are now allowed to sell 100

percent of their production domestically. Moreover, NAFTA also liberalized trade and

investment in the textiles and apparel sector —the maquiladora industry’s second-largest

employer. Moreover, local-content rules in Mexico’s automotive sector were relaxed to

allow treatment of maquiladoras as national suppliers for purposes of complying with


Global Financial Crises 107

local-content requirements. Finally, prior to NAFTA, maquiladora goods entering the

United States were assessed duties on the part of the good not of U.S. origin. With

NAFTA, the value added to maquiladora output in Mexico, along with U.S.-origin inputs,

is now typically excluded from duties (Federal Reserve Bank of Dallas, 2002). The

following are the benefits of NAFTA, MAQUILADORA and MAQUILA programs as

follow:

• The growth rate of U.S. industrial production. Maquiladoras can be seen as part of

the U.S. industrial production process: When production grows faster,

maquiladora employment goes up in the same year. The effect is not only positive

but also relatively quick. Rising manufacturing activity in the United States

quickly results in new orders for the maquiladoras.

• Environmental restrictions may have created another disincentive to operate under

the maquiladora program. In some cases, waste-handling and treatment

regulations were stricter for maquiladoras than for other Mexican plants making

the same products and exporting to the United States. Manufacturing firms' ability

to obtain duty-free benefits under NAFTA without additional cost or

environmental restrictions—which maquila industry membership would impose—

could have encouraged such firms to operate outside the maquiladora program

post-NAFTA.

• NAFTA also eliminated quotas, which especially impacted the textile industry.

With no constraints on the amount of textiles that could be exported back to the

United States, textile firms may have had an incentive to construct maquila

operations in Mexico. Many observers have concluded that NAFTA's treatment of


Global Financial Crises 108

the textile/apparel sector has significantly affected the maquila growth in that

industry.

• The maquiladora employment fluctuations are Mexican-to-U.S. and Mexican-to-

Asian manufacturing wage ratios. While the relationship between U.S. industrial

production growth and maquiladora growth is positive, the relationship between

these wage ratios and maquiladora growth is negative. In other words, when

Mexican wages increase relative to foreign wages, maquila employment growth

declines (Federal Reserve Bank of Dallas).

The impact of globalization on the flow of labor within Mexico and the affect of

Maquiladora and Maquila programs, first the Mexican GDP growth rate for the same

period 1989 was 1.3% and in 1991 4.2% and in 1993 2% and in 1994 (4.5%) and in1995

-6.2%, in 1996 5.1%, in 1997 6.8%, in 1998 (4.9%) and declining until finally in 2003

1.5%. This indicated that Mexico economic growth declined during the recovery period

(1996/97). Since the GDP in 1993 was 2% and the world average was 3.3% indicating

that financial crisis on the horizon and Mexico slow growth might also contributes to the

reasoning of crisis on the horizon. Furthermore, in the pre-tequila period, imports and

exports were the most dynamic components of GDP.

The rate of growth of exports excluding Maquiladora in era between (1989-1994) was

$168,479 millions and in the era of (1989-1994) including maquiladora was $277,534

millions; thus the difference is $109,055 millions and this different could be contributed

to the maquiladora affects. In the era of (1995-2000) export excluding maquiladora was

$395,531 and export including the maquiladora $706,191millions and the difference is

$310,660 millions and could also be contributed to the maquiladora programs. On the
Global Financial Crises 109

other hand, imports excluding maquiladora in the era of (1989-1994) were $148,048 and

import including maquiladora $277,534 millions and the difference is $129,486; this also

could be attributed to the maquiladora programs. In the era of (1995-2000) the imports

excluding maquiladora $395,511 millions and including maquiladora $706,101 and the

difference is $310,590 millions and this also contributed to the maquiladora programs.

Hence, the total of the maquiladora programs form 1989 to 2000 in export sector is

$697,243 millions and the imports for the same period were $440,036. Therefor, the

maquiladora has positive affect on Mexico trade sector. Thus, this sharp rise in the

growth rate of imports reflects the effect of the appreciation of the real exchange rate that

occurred prior to devaluation at the end of 1994 and NAFTA programs played a big role

in both export and import (inventories import and re-export). Moreover, the tequila crises

was sparked by the announcement of a 15% nominal devaluation in December 1994, and

ended with a depreciation of the exchange rate of 43% by March 1995. In those years,

there was a rapid growth in imports and exports, which indicates an imbalance of trade

and economic difficulty. During the tequila crises there was an increase in the growth rate

of exports accompanied by a decrease in imports. Both tendencies certainly helped to

cushion the fall of GDP in 1995. Thus, there is no doubt maquiladoras are an important

part of Mexico's international trade picture. Year in and year out, Maquila plants are

responsible for more than 40% of Mexico's exports. Over the years, with or without

NAFTA, the maquiladora industry has grown substantially. During the five years prior to

NAFTA, maquiladora employment grew 47%. But over the first five years after NAFTA,

employment growth soared 86%. This growth was not simply a matter of existing plants

taking on more workers but of rapid expansion in the number of plants. The 1,789 in-
Global Financial Crises 110

bond plants at the end of 1990 grew to 2,143 at the end of 1993—just before NAFTA—

and to 3,703 by the end of 2000. The acceleration of foreign direct investment under

NAFTA also contributed to the creation of more than half-million new employment

opportunities in the U.S.–Mexico border region. For example, NAFTA allows U.S.–

Mexican production-sharing operations in the maquiladora mode but without the

maquiladora program. In any case, if maquiladora production and trade were linked to

NAFTA, their importance for modeling NAFTA's impacts would be markedly different

than if NAFTA did not influence a large portion of U.S.–Mexico trade. Therefore,

globalization would not eliminate the advantages of NAFTA since every country would

be facing the same conditions. For example, if maquiladora activity is not affected by

NAFTA. On the other hand, NAFTA may have encouraged maquiladora expansion by

eliminating all Mexican programs that favored specific industries. NAFTA also

eliminated quotas, which especially impacted the textile industry. NAFTA limits on

Maquiladora domestic sales, which affects the Mexico national economy. But in 2001 the

NAFTA limit on Maquiladora domestic sales was totally relaxed so that, if they so desire,

Maquiladoras are now allowed to sell 100 percent of their production domestically.

Moreover, NAFTA also liberalized trade and investment in the textiles and apparel sector

—the Maquiladora industry’s second-largest employer. Moreover, local-content rules in

Mexico’s automotive sector were relaxed to allow treatment of Maquiladoras as national

suppliers for purposes of complying with local-content requirements. Finally, prior to

NAFTA, Maquiladora goods entering the United States were assessed duties on the part

of the good not of U.S. origin. With NAFTA, the value added to Maquiladora output in
Global Financial Crises 111

Mexico, along with U.S.-origin inputs, is now typically excluded from duties (Federal

Reserve Bank of Dallas, 2002).

Foreign firms paying wage according to the study Making The Invisible Visible: A Study

of Maquila Workers in Mexico-2000, in Matamoros, across from Brownsville, Texas, a

family of four needs 193.86 pesos a day to reach a sustainable living wage. Based on pay

slips collected from a number of Maquiladora workers, a majority takes home less than

55.55 pesos (approximately US$6.00) a day, which is 28.6% of what a family of four

people, needs to meet its basic needs. One minimum wage salary in Matamoros provides

only 19.6% of what a family of four needs to earn (Maquila Workers, 2003).

Moreover, the impact of Maquiladora program's on labor welfare in Mexico. The

Mexican government has long demonstrated a persistent pattern of failure to protect the

rights of its female manual laborers during Mexico’s struggle to become an industrialized

nation. The Mexican government has allowed foreign investment and the quest for

economic stability to take precedence over the well-being of its own citizens who work in

the Mexican Maquiladora factories. As a result, female Maquiladora has endured

discrimination and marginlization. The maquiladora factories are havens for foreign

investment in Northern Mexico because labor is cheap and plentiful, especially female

labor workers. A direct cause of this is the Mexican government’s willingness to let

women remain the cheapest form of labor by allowing foreign investors to circumvent the

national labor laws that would increase costs. This willingness to look the other way is

compounded by the ineffective prophylactic obligations of the North American Free

Trade Agreement (NAFTA) and its labor side agreement, the North American Agreement

on Labor Cooperation (NAALC). The trade agreements fail to fully address the needs and
Global Financial Crises 112

concerns of female maquiladora workers and fall short of enforcing Mexico’s national

labor laws. “Many critics argue that the maquiladora program is transforming Mexico

into a ‘maquiladora country’ rather than developing a strong Mexican industrial base that

will sustain Mexico’s growth into the future, and that maquiladoras are failing to provide

the technology transfer necessary to develop Mexico’s own national industries.” “Further,

the critics contend, the maquiladora industry is changing Mexico’s value system and

culture and thus profoundly affecting Mexico’s national identity (Nesl Journal, 2002).

Furthermore, the international movements of labor and the issue of remittances; the

international movement of labor benefit the recipient countries by means of sending

money from the country where they work to their home country and this considered as

surpluses to the country current account. For example, countries in the Middle East desire

to employ foreign domestic workers e.g. Saudi Arabia, Qatar, Kuwait, and the U.A.E.

They first preferred Arabs, then Muslims, and if there were further openings workers of

other religions. Violations of basic human rights, abuse, harassment and exploitation are

more common in countries of the Middle East than in countries of Europe or East Asia.

Reasons for this situation may be seen in special Socio Political structures, cultural

orientations, and lack of familiarity with core labor standards or the lack of labor

standards. For example, domestic servants working in households in these countries

encounter treatment ranging from hostility, racism, or indifference to love and affection.

the direct foreign investment benefited the recipient country and how international

movement of labor benefit the recipient country. In this case I have chosen Sudan as an

example. According to Stalker (1994) Sudan sent large numbers of emigrants overseas, in

total about 500 thousands workers were abroad including two thirds of the country’s
Global Financial Crises 113

technical and professional workers. The ILO in 1985 estimated the number to be around

500,000, which was 60% of the total national stock of skilled workers. According to the

research the total number of the Sudanese emigrants was 1,764,000 during the period

from 1978 to 1991. Total Sudanese emigrants were in Saudi Arabia was (48.3% and

40%) in 1990 and 1996 respectively the labor market policy of Saudi Arabia since the

early 1970 gave priority to Arab applicants for work permits, as the rapid economic

growth in the country led to severe shortages in labor (Estuarine Research Federation,

2002).

The positive aspects of emigration include remittances, high tax obligations, and

experience and skills gained. Emigrant families are more likely to improve their

dwellings, own assets, and own durable consumer goods.

Emigration policy recommendations include a) counting emigrants in fertility studies, b)

programs to tax the income of emigrants' wives, c) educational policies for the children of

returning emigrants, d) investment projects directed toward emigrant women, f) media

campaigns to inform and acculturate emigrants, g) family planning programs for

emigrants, and making use of emigrants to fund necessary commodities and exports.

Another impact of having Sudanese immigrate legally or illegally to the Saudi Arabia and

the negative effects on the Sudan emigration has led to the loss of a large number of

skilled personnel. This has inflicted a heavy cost on the economy representing a huge loss

of the country’s investment in human capital. The compensation for this loss of skilled

labor has been the remittances that Sudanese workers abroad have sent back to their

families. However, there is little evidence that remittances have benefited lower-income

households. According to the results of the 1996 Migration and Labor Force Survey, 90%
Global Financial Crises 114

of all remittances were sent back by the 62% of emigrants with a secondary school

education or higher. This statistic suggests that remittances are likely to have had a

disequalizing impact on the distribution of income within Sudan.

In addition to receiving a small share of remittances, low-income households are

adversely affected by the loss of emigrant labor. For example, agricultural households

first report mainly a labor shortage as a result of emigration of a household member

(Estuarine Research Federation, 2002).

Eventually the main impact is felt through the constraint. Eventually the main impact is

felt through the constraint placed on cultivating land and the ensuing reduction of

production. About 86 per cent of agricultural households reported this constraint as a

problem that was attributable to emigration. Sudan The share of industry in GDP fell

continuously from the mid 1980s until the mid 1990s. But after the mid 1990s, industry

began to grow. Most of this growth was fuelled by the oil industry and foreign direct

investment and took place in large urban centers such as Khartoum and Port Sudan.

Between 1998 and 2001, industry grew by 10 per cent per year (World Bank, 2003).

Finally, globalization can also impact environmental quality in less obvious ways.

Openness to trade, which encourages countries to specialize in producing the goods for

which they have a comparative advantage, can alter the composition of a country's

output. The effects on pollution are ambiguous. Foreign direct investment can introduce

more up-to-date and often cleaner production techniques in place of older, less

environmentally friendly ones. As is the case with globalization and the environment,

conflicting forces make the relationship between globalization and child labor complex. A

developing economy that opens itself to investment and trade may be expanding its
Global Financial Crises 115

opportunities for, and the productivity of, child labor. Other things equal, this effect

would increase the incidence of child labor, however regrettable that practice may be.

Acting in the opposite direction, though—analogous to the case of environmental quality

—is an "income effect." Poor households that see their real incomes rise through trade

may have less need to rely on the labor of their children (MAQUILA PORTAL, 2004).

Hence, the issue that has become known as “globalization,” which has played out in this

country around clashes over the North America Free Trade Agreement (NAFTA), the

World Trade Organization (WTO), and most recently trade status for China, is not just

about trade. Corporations are not only moving goods across borders—they are also

moving capital, factories, and jobs. The fight is not just about tariffs but all kinds of laws

protecting labor, defending the environment. Globalization is also threatening many

useful public services with private corporations demanding the right to obtain Social

Security, schools, airports, prisons, transit systems—and even our drinking water. In the

fight around NAFTA we were told by many “friends of labor” free trade was a win-win

situation. Economic growth would mean increased prosperity for American, Canadian,

and Mexican workers alike. The result has been just the opposite. While a new, thin layer

of rich has developed in all three countries around NAFTA workers and farmers in all

three have taken a beating. The impact on U.S. workers has been far greater than the

several hundred thousand jobs that have been directly lost to “free trade.” The mere threat

by bosses to relocate jobs has had a chilling effect on labor relations. Workers displaced

by job movement have taken a cut in wages and benefits while most other workers, wary

of relocation threats, have settled for stagnant wages—even in the midst of what is

supposed to be unprecedented prosperity. It is important for U.S. workers to sort out who
Global Financial Crises 116

are our allies and who are our adversaries in the globalization struggle. Our enemy is not

the working people of China, or Mexico, or any place else. We're in a fight with the

multinational corporations—the biggest of which are based in our country—and the

governments and politicians who do their bidding. We must be wary of some who try to

latch on to the fight against globalization to promote a more sinister agenda. We should

soundly reject those appeals in no uncertain terms. The bottom line is that if globalization

prevails the living standards of working people everywhere will be driven down to the

lowest level anywhere. The only effective defense is to promote workers standards

everywhere through organization and solidarity. Our allies are the workers of the world.

We help ourselves when we assist them. We also have important allies in the

environmental movement who correctly view globalization as a monster threat to our

planet's environment. The U.S. labor movement has made great progress in understanding

globalization and taking initiatives to fight it. The struggle will continue (Kclabor, 2004).

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