Modern Finance, Methodology and the Global Crisis Esteban Pérez Caldentey and Matías Vernengo

[Working Paper No. 01/2011] The conceptually unified theoretical core of modern finance, which includes the efficient market hypothesis, the CAPM, the Modigliani-Miller theorem and the Black-Scholes-Merton approach to option pricing, has been instrumental in the growth of the financial services industry, financial innovation, globalisation, and deregulation. The elevation of finance to the stature of a scientific discipline was successful in rendering irrelevant the long-standing moral concerns associated with capitalism and laissez-faire. This success was somewhat of a paradox, since the core theories/theorems were based on wildly unrealistic assumptions and did not stand out for their empirical strength. Overcoming this paradox…

Remittances and Reverse Flows in Developing Countries Anupam Das and John Serieux

[Working Paper No. 02/2010] This paper departs from the assumption prevalent in existing empirical literature that remittances are used either to increase consumption or to increase investment in developing countries. Instead, the present investigation demonstrates that a significant portion of remittances is no longer available for domestic resource mobilization when they are used for debt servicing, capital flight, or reserve accumulation (reverse flows). Empirical results obtained by employing Pooled Mean Group (PMG) approach on a panel of 36 developing countries over the period 1980 to 2006 finds that a one per cent increase in the rate of remittance flows increased…

Balance of Payments-Consistent Unreported Flows Edsel L. Beja Jr.

[Working Paper No. 01/2010] The paper develops a balance of payments-consistent procedure for estimating unreported flows. Using data between 1990 and 2007, total unreported flows of ten selected Asian countries is estimated at 80% of their 2007 combined GDP. The paper also examines the empirical relationship between the volume of reported and unreported flows. Unreported flows increase with increase in reported flows and economic growth as well as weaknesses in the governance of reported flows and accumulated unreported flows. In contrast, financial depth and governance of the real sector decrease unreported flows. Altogether, the results indicate that unbalanced financial and…

The Unnatural Coupling: Food and Global Finance Jayati Ghosh

[Working Paper No. 08/2009] The dramatic rise and fall of world food prices in 2007-08 was largely a result of speculative activity in global commodity markets, enabled by financial deregulation measures in the US and elsewhere. Despite the recent fall in agricultural prices in world trade, the food crisis has exacerbated in many developing countries where food prices remain high and even continue to increase. The financial crisis also directly operates to increase food insecurity by imposing constraints on fiscal policies and food imports in balance of payments-constrained developing countries, causing exchange rate devaluation through capital flight and adversely affecting…

Pension System Reform in Latin America and Potential Implications for the Chinese Case Daniel Titelman, Cecilia Vera and Esteban Pérez Caldentey

[Working Paper No. 06/2009] In the past two decades, Latin American countries reformed their pension systems focusing mainly on addressing the weaknesses of the contributory schemes fiscal unsustainability, low coverage levels and a high degree of segmentation and barely addressed the non-contributory element. Thus, the reforms have failed to meet their objectives. Firstly, to this day, a large proportion of the population remains inadequately covered by the contributory system. Secondly, the fiscal outcome of the reform was worse than originally planned. Structural constraints such as the limited savings capacity of some population groups and the instability and precariousness of the…

A Perspective on the Growth Process in India and China Prabhat Patnaik

[Working Paper No. 05/2009] In critique of the current growth process being experienced in India and China where inequalities have increased dramatically despite extraordinarily high growth rates, this paper argues that an increase in inequality is built into the dynamics of the system through the non-using up of their “labour reserves”. Labour reserves continue to remain non-exhausted because at the rate of growth of labour productivity, which arises as a consequence of the shift in demand towards products that entail the use of technology with higher labour productivity, the rate of growth of labour demand does not adequately exceed the…

The Natural Instability of Financial Markets Jan Kregel

[Working Paper No. 04/2009] This paper gives a detailed exposition of Hyman Minsky’s Financial Instability Hypothesis which takes the US financial system as its reference structure and provides a historical account of financial sector evolution and regulatory changes in the US in the run up to the current crisis. In Minsky’s approach, fragility is inherent in the successful operation of the capitalist economic system, and results from changes in the liquidity preferences of bankers and businessmen for a given degree of maturity mismatching. While financial fragility is independent of financial regulation, regulation may play a role in the rate of…

Macroeconomic Regime, Trade Openness, Unemployment and Inequality: The Argentine Experience Roxana Maurizio

[Working Paper No. 03/2009] This paper analyzes the Argentine experience of the interactions of macroeconomic regime, labour performance, income distribution and poverty during the Convertibility Plan and the new macroeconomic regime that followed the collapse of the currency board regime. Differing theoretical perspectives are discussed, and diverse labour and social indicators analyzed. The macroeconomic framework is found to have a bearing on the social situation. Further, the negative effects of the macroeconomic configuration on the labour market and income distribution persist even after the country has resumed a growth path. The complete recovery of the standard of living conditions thus…

Cuba: Economic Restructuring, Recent Trends and Major Challenges Elda Molina Díaz

[Working Paper No. 02/2009] The collapse of the European socialist block at the end of the 1980s caused a deep crisis in the Cuban economy. One of the distinctive features of the process of adjustment and reform of the Cuban economy carried out by the government was that even during the worst period of the crisis, the Revolution’s main social achievements in education, healthcare and social security were preserved. At the same time, the measures introduced by the government succeeded in the following areas: resumption of economic growth; sectoral diversification and reinsertion into the world markets; and partial correction of…