Effect of Washington Consensus Upon Emerging Market

chapiter Consensus implemented by emergent market places refers to economical policies created by John Williamson (Hooper, 2002 Rodrik, 2006). It is base on monetary slackening theory of McKinnon and Shaw, which wildness on freeing pecuniary markets from government intervention. monetary relaxation theory assumed perfect monetary markets with perfect entropy, perfect competition and depends on institution-free synopsis (Demetriades, 1999). These assumptions argon irrelevant in the sense that market, as a whole is imperfect.Despite these deficiencies, acclivitous countries check over to implement chapiter Consensus requested by world-wide financial Policy (IMF) and World money box as part of their loan contracts. According to Washington Consensus, acclivitous economies facing similar problems with developed markets should be toughened with the same tools. Washington Consensus aims to push privatization with mellowed train of economic openness. There be many criticisms regarding the policies content of Washington Consensus.Some critics argue that the policies ar non being devised in a sequentially fall off manner and did non consider appear markets learning stage (Hooper, 2002). There are several impacts of the effectuation of Washington Consensus upon the emerge great markets namely aggravate economic festering and increase stress markets capriciousness. Implementation of the Washington Consensus by monetary liberalization has usurped economic gain of emerging great markets. monetary liberalization is developed in the objective of up economic growth by encouraging saving, investment and nifty productivity.Before monetary liberalization is introduced, many developing countries encounter pecuniary repression, which is the process where government intervenes in the economy (Demetriades, 1999). In 1960s and 1970s, government intervention was needed to checker pegged permute range under Bretton-Wood regime. G overnment controlled the markets by allocating high reserve requirement, interest rank ceiling, and unconditional capital, credit as well as exchange mark. These interventions led to disequilibrium in interest rate, for example, interest rates were be embarrassed equilibrium level (Hooper, 2002).In prepare to curb the problem, financial liberalization is introduced, for instance, by setting higher(prenominal) interest rates. High interest rates were aimed to encourage savings, which allow for attract investment by borrowing and thus improved economic growth. Unfortunately, financial liberalization did not af stipulationath in greater savings instead high interest rate laughingstock destroy reformation in sure sector (Hooper, 2002). In addition, financial liberalization exacerbates economic growth in the sense that ratio of militia to foreign denominated short-term indebtedness had declined substantially (Stiglitz, 2000).Washington Consensus suggests emerging capital marke ts to deregulate their economies in battle array to achieve economic growth. However, lack of comprehensive prescript has led to Asiatic Financial Crisis in 1997. Moreover, strangle economic growth during Asian Financial Crisis came from matureness and currency mismatch. For example, long-term investment in local anesthetic currency financed short-term liabilities in dollars. Besides, Washington Consensus did not emphasis on capital flow social organization in liberalizing capital flows. Many emerging capital markets destabilized receiv satisfactory to high level of capital flows.In Latin America (1980), economic crisis was a result of cash flow structuring problem with the increase in portfolio equity to replace portfolio debt. Asian Financial Crisis 1997 has been deteriorated due to regular flows of money between financial markets. This term hot money will flow from countries with low return to countries with the highest interest rates as banks effort to get highest return as possible. These flows can affect balance of payments if exchange rates in the integral is high (Hooper, 2002).Thus, Washington Consensus worsens economic growth of emerging capital markets. Volatility of stock markets is too moved(p) by the implementation of Washington Consensus. Financial liberalization petabyte emerging capital markets to more excitableness. This is because financial liberalization encourages deregulating, and liquidity, which are the components enhancing capriciousness. It also goes for taxation as pooh-pooh taxes melt down to unpredictability. Since liberalize markets usually kick in lower market concentration, volatility will also increase (Hooper, 1998).Moreover, increasing portfolio equity flows increasing volatility of stock markets (Hooper, 2002). These situations land the attractiveness of investing in emerging stock markets (Stiglitz, 2000). Besides, stock markets volatility will be exasperated when in that respect is no enough write u p disclosure since investors are not able to make informed judgment about the firm. However, financial liberalization did not improve accounting disclosure and structure of governance (Hooper, 2002).There is negative relationship between quality of accounting ashes and volatility of stock market. Poor accounting system lead to higher market volatility. Moreover, Washington Consensus policy of deregulation has also intensified volatility of stock market (Hooper, 1998 Hooper, 1998). In addition, financial liberalization increased volatility of stock markets with changes in outside country. Since, emerging markets seemed risky, investors are discouraged to invest in the markets. Thus, results in big capital outflows (Stiqlitz, 2000).However, in the long run, volatility of emerging stock markets is improving as they liberalize. International investors control investing in emerging markets are remunerative since their risk-return of overall portfolio improved. Investing in emerging stock market lead to diversification of risk, as there is low correlation with other markets (Hooper, 1998). Despite that, implementation of Washington Consensus in emerging capital markets lead to volatile stock market especially in the short-term cycle.There are several ship canal for IMF and World commit to conduct policy in developing countries. One of the ways is IMF and World Bank have to make sure that Washington Consensus policies are implemented in correct sequencing manner (Hooper, 2002). For example, financial sector should be reformed after regulative and bank supervision are restructured and after unfeigned sector has been reformed. IMF and World Bank should also encourage developing countries to review and comprehend their regulation system since deregulation can harm economic growth (Hopper, 2002).Furthermore, fortifying securities and accounting regulation help reduce volatility (Hooper, 1998) by implementing framework and policies like fiscal policy, which rede the countries stock markets volatility. Besides, IMF and World Bank should bequest emerging countries to be more unmingled in accounting disclosure and adopt good governance structure. For example, companies with myopic governance are required to pay high return to investors. To reduce the premium, corporation should lessen information asymmetry by increasing accounting disclosure.Thus, constitute of equity is lowered since investors are more awake about the firms cash flow. Moreover, accounting disclosure overcomes capital flows problem while clear securities framework helps lower volatility. Accounting disclosure should improve so that firms are abled to be monitored and controlled by government (Hooper, 2002). In addition, higher interest rates in emerging capital markets leads to adverse selection and moral back problem. unfavorable selection normally occurs when interest rates are high as borrowers invest in passing risky investment without lenders knowledge.While moral hazard arises when borrowers invest in projects they had not agreed to. This can lead to increase in cost of borrowing for other borrowers. Thus, encouraging accounting disclosure helps to reduce adverse selection and moral hazard. For example, Thailand and South-East Asian faced moral hazard due to insufficient accounting disclosure and comprehensive regulation (Hooper, 2002). Besides, transparent information helps heal economic growth through effective resource allocation (Stiglitz, 2000).IMF and World Bank should also emphasis on book binding constraints on economic growth by finding ways to correct the constraints. It is important for an economy to use the countenance tools in reducing the constraints. For instance, reforming financial intermediaries will not improve investment with poor property rights. Thus, binding constraints have to be evaluated (Stiglitz, 1998). In conclusion, implementing Washington Consensus in emerging capital markets is not in force(p). It deterior ated economic growth of many developing countries for instance, East Asian and Latin America were in bad financial crisis.Moreover, the liberalization process also affects stock market of emerging countries by exacerbating stock markets volatility. Thus, International Monetary Fund and World Bank have to contact their role by setting up efficient policies in order to curb problems arise from the implementation of Washington Consensus as well as improving the economy of emerging countries. REFERENCE LISTS * Demetriades, P 1999, Financial liberalization the experience of developing countries, Eastern sparing Journal, vol. 25, no. 4, pp. 441-457. Hooper, V 1998, Volatility and openness of emerging stock markets some empirical evidence, uphill Capital Markets Financial and Investment Issues, pp. 35-45. * Hooper, V 2002, The Washington Consensus and Emerging Economies, pp. 1-14. * Rodrik, D 2006, Goodbye Washington Consensus, hello Washington Confusion, pp. 1-28. * Stiglitz, J 1998, M ore instruments and broader goals go toward the PostWashington Consensus, pp. 1-46. * Stiglitz, JE 2000, Capital market liberalization, economic growth, and instability, World Development, vol. 28, no. 6, pp. 1075-1086.