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   Course Title    Emerging Financial Markets: Globalization, Economic Growth and New Strategies
Lecturer    Marina A. Popova
Institution    Rostov State Economic University
Country    Russia

Introduction (Description of the Course):

In the era of economics new technologies are creating an environment that is very favorable for the expansion of the financial sector. They are particularly suited to all activities, which are global, non-stop, immediate, and immaterial. The "big bang" of the world’s stock exchanges and the deregulation brought in during the 1980s by M. Thatcher and R. Reagan, and the subsequent collapse of the communist block in the 1990s, created the conditions for the economic globalization which has been the principal dynamic of the final years of the twentieth century, and from which no country can escape any longer. Two of the pillars on which modern democracies once rested – progress and social cohesion – are being replaced by two others – communication and the market – which are changing their nature. Nowadays, the market has a tendency to flood all human activities and to bring them under its control. That’s why it’s extremely important to elaborate clear unambiguous understanding of current developments in the structure and character of the emerging financial markets taking into careful consideration the economic globalization context.

The main focus of the proposed course is a scientific track (study and comparative analysis) of the most recent developments in the emerging financial markets (primarily meaning investigation of financial markets, globalization processes, theoretical concepts and mechanisms behind their functioning, and effectiveness measurement (as well as empirical applications and evidence) in the Central and Eastern European countries with a special emphasis on Russia. We expect to examine a broad range of panel data from Russian markets and to make cross-country comparisons).

Students’ prerequisite knowledge basis for course participation: For course participation students are expected (but not required) to have taken the following courses: International economic Relations, Essentials of Financial Management, Introduction to Securities markets and Money, Credit and Banking. From these disciplines students must gain basic knowledge in the field, such as the definition of financial markets and financial instruments, multinational economic integration, its main causes and manifestations.

Objectives of the Course and Learning outcomes:

Global financial markets are on the threshold of a new era. After almost two decades of dramatic changes and transformation in the structure and functions of national financial markets and financial service industries, a more or less "perfectly integrated and globalized" system has emerged more efficient, while the financial service industry has been reduced to little more than an information industry. However the transformation has not been without implications and complexities (such as financial crisis all over the world). The course will focus on the way in which different sequences of events in this globalization process affect the ability of financial markets to attract and channel savings in order to improve real national growth. The short history of market transformation in Russia is quite different from the more "balanced growth" experienced by most developed countries as well as some Central European countries, where economic growth and industrialization occurred more or less in tandem with the needed institutional developments. (So we shall make a special emphasis and investigate these particularities of the national financial markets).

Main objectives of the course:

  1. To draw key theoretical developments and show how understanding of these issues is vital for successful functioning in the XXI century.
  2. To establish a conceptual framework for the comparative analysis of the emerging financial markets which is grounded in the financial economics of markets, international studies and adjacent social sciences.
  3. To establish for each student a wide view of various globalization issues with particular emphasis on financial markets and valuation principles and instruments for performance in a global environment.
  4. To explore complexities of a global finance and find out new imperatives of modern financial policy on the emerging markets.

Learning outcomes: At the completion of the course students will be able to:

  • Apply tools of cross-country, country, and company analyses necessary to increase economic potential and national growth rate as well as country and company competitiveness in the global environment;
  • Articulate different approaches to and perspectives on strategic financial management and decision-making;
  • Identify contemporary issues in the global business and finance arena;
  • Develop and implement a plan of action to address a particular strategic finance issue;
  • Use external, faculty and peer feedback, regarding personal abilities, to be a contributing and effective organizational member;
  • Apply concepts, skills and tools related to project and individual assignments.

Course pedagogy (teaching methodology used):

Our approach to learning the subject matter of this course will be one of integration. We will employ an interdisciplinary approach while studying this quite topical issue, including lectures, seminars, case study and experimental format. We will work to recognize and capture the ‘comparative advantage’ of each class member.

The conceptual matter of the course is presented through class lectures, discussions and seminars. An initial reading of the day’s topic is expected. Selected problems will be developed in class to support our understanding. I encourage review the topics of the course beforehand. If you can make a significant contribution to class lectures, please contact me in advance so that we can weave your contribution into our course progression. In addition, from time to time, we will invite experts from outside the class to contribute to our learning.

Initial conditions for case studies assume a sharing effort. My role is to lead the discussion, to keep the class focused, and to strive for an atmosphere of learning for all. Full preparation by each class member is expected. Course projects provide all students with the opportunity to exercise independent and team-oriented skills. We will complete two projects. In one, you hold absolute advantage, in the other, your group will need to put together individual efforts in order to produce a final report. My role is one of advisor and consultant.

Course organization:

The course is organized around four basic themes:

Part I. Economic globalization and economic growth issues.

Part II. Recent developments of new financial markets (cycles, frameworks and logic of functioning).

Part III. Governing toward "perfect financial order". International integration and new financial regimes.

Part IV. Financial strategies: in search of new targets. How to avoid financial crisis.

The progression of topics will follow this thematic core and sequence. We integrate the use of case studies and conceptual material throughout the flow of the semester. The format of the text supports this structure. It is both an economical and efficient blending of theory, evidence, and practice. We will supplement the text with additional readings and cases when necessary.

In the context of these basic themes we will also put an emphasis on the following areas:

  • EU enlargement and European economic integration. Some financial aspects (Euro introduction).
  • Political risks vs. financial risks. Measurement techniques.
  • Securities markets in the age of globalization.

There are 18 class meetings. (Two meetings are reserved for examinations. The mid-term and the final are two-hour in-class examinations. Students often request copies of old examinations. The format for this course is new, no examination history exists).

There will be 3 lectures for each part of the course (12 lectures altogether). Also there will be one seminar per section (designed in a way to draw final conclusions and also to shortly discuss and present individual assignments and the group project).

Course work products: Each student is required to complete four work products. Three of these are individual work efforts and one is a group project. The individual work products are: 1) a mid-term examination; 2) a final exam; 3) the individual assignment Country presentation (meaning investigation of financial markets features, trends, history, statistics, other parameters and overall financial policy in the country with emerging markets (of students own choice). The group work product is the fourth work effort and is the Comparative Perspective of modern financial policies in the emerging financial markets (meaning cross-country comparative analysis and drawing the particular set of regulations/instructions/recommendation). We will work out the format for each case study separately and in more detail throughout the progression of semester (on the seminar meetings).

Grading: Grades are computed as the equally weighted average of each student’s performance on the four work products mentioned above. Inputs necessary to achieve any performance level are not directly measured. The quality of class participation will serve as the swing vote for the borderline cases in final grading. I expect to assign five grade levels in this course (ranging from 1 to 5). The grades 4 and 5 are reserved for exceptional and well above-average performance. Grades lower than 3 are possible but suggest a serious lack of application.

Lecture and Seminar Synopsis:

Part I. Economic globalization and economic growth issues.

Lecture 1. Theories of economic development. Policy realities of economic development. Countries (as actors within international economic relations) find economic development important and attractive for many reasons. On a very basic level, economic development improves living standards and allows people to live longer and more comfortable lives. But what is most significant, economic development may also provide a sense of economic power, economic security and prestige (until recently it provided a sense of independence as well). However with the growth of economic interdependence between and among the countries world-wide, independence is fading as a rationale for economic development. Developing countries (or countries with emerging markets and economies) require more capital before economic growth can accelerate, and there are only five ways to attain capital needed for further development: create it oneself; borrow it from public or private international financial institutions (such as the World Bank or Manufacturers Hanover); attract private investment (foreign direct investment); develop hard currency sources by exporting domestically produced goods; and receive foreign aid. Over the years, several distinct schools of thought emerged out of debate over economic developments. We will examine two of them: modernization theory and dependency theory. Both are widely accepted, but their views on economic development are significantly different. Scholars and analysts nowadays are continuing to try to develop new ways of understanding the issue more thoroughly (some have begun asking why different countries facing similar situations and problems have chosen different developmental strategies and exploring on a comparative basis what can be learned from the experience of these countries). A recently-emerged new school of thought, called sustainable growth, argues that economic development must "meet the needs and aspirations of the present without compromising the ability of future generations to meet their own needs". As a concept sustainable growth makes sense, as a set of policies, there is still a long road to travel before it is implemented. Beyond the realm of pure theoretical debate over economic development numerous everyday policy disagreements about it have existed and continue to exist (so we will examine empirical applications as well).

Lecture 2. Emergence of a global Economics: theoretical perspectives and empirical evidence. Global economic subsystems. International actors become involved in the international economic system because they believe they will benefit from doing so. How actors (countries) engage the system can best be approached at five different levels. They are: 1) international economic strength (industrial base, skills and training, internally available resources, access to external resources, accumulated wealth, organization, strategy, leadership must all be considered here) – to an extent, international economic capabilities determine the roles that particular countries play on international arena, this level is crucial for understanding how economic capabilities and constraints influence a country’s mesh with the international community and economic system; The second, third and fourth levels are the stuff of traditional international economics: 2) international trade; 3) international monetary policy; 4) finance policy. All are key elements in an actor’s attempts to supplement their internal economic capabilities; 5) major subsystems of international trade. One of the most volatile economic (strategic and security) issues facing decision makers in states and other international actors on into the 21st century will be the proper blend between economic interdependence (that is globalization) and economic independence (economic security). The implications of this simply phrased issue are immense. To complicate matters even more, most analysts of contemporary economics recognize 3 global economic subsystems. We will also speculate on three major schools of thought concerning international trade and monetary regulations: 1) Liberal trade school; 2) the Marxist trade school; and 3) Structuralistic trade school.

Lecture 3. The global distribution of wealth. Economic growth issues. In addition to economic development, the global distribution of wealth is an immense issue in international economics. When projections for future population growth are viewed in conjunction with projections for future GDP increases, it becomes clear that although the GDP in several emerging economies is expected to expand more rapidly than that of developed countries, their lower starting points will lead to a larger gap in per capita income between developing and developed states. The bottom line, then, is that although the standard of living in some developing countries in absolute terms may be higher in the future than it is now, in relative terms it will have deteriorated vis-a-vis the industrialized world. Even under conditions where emerging economies growth takes place, sizable disparities in wealth between rich countries and poor will continue to exist. There are both pragmatic and moral reasons to have concern about the unequal distribution of wealth throughout the Globe.

Part II. Recent developments of new financial markets (cycles, frameworks and logic of functioning).

Lecture 4. Financial markets and financial instruments: an overview. Because of the changes taking place in financial markets, financial managers face vastly more complex choices now than they did, say, 10 years ago. Because of this increase in complexity, public and corporate finance professionals are required to have an advanced knowledge of how these financial markets operate, how financial instruments are priced, and how they can be used to add value to their companies, businesses, shareholders and gross national wealth. This lecture is devoted to making students adept at dealing with constantly changing world of finance around them and the new challenges they face in this world. The first step in developing necessary skills is to become familiar with what the new world of finance looks like (especially in emerging economies), who the players are, and what possible choices are. In this vein, the lecture is attempting to broadly describe the securities available for external financing, current trends in financing the company, the institutional and regulatory environment in which securities are issued, the process of issuing itself, global differences and recent trends in raising capital. A more detailed discussion of the debt and equity emerging financial markets will be provided in the following lectures.

Lecture 5. Recent trends world-wide: globalization, deregulation, innovation, securitization, technologic boom. In many respects financial markets throughout the world have changed dramatically over the past 10 to 20 years and should continue to change in the future. Financial markets are global now. Current trends are likely to have an important influence on how governments, corporations and individuals behave on financial markets world-wide in the future. These include globalization and deregulation of capital markets, an abundance of new financial instruments, more efficient trading technology, and securitization. Large multinationals routinely issue debt and equity outside their home countries. As companies are better able to shop globally for finance (capital), we can expect regulations around the world to become similar, and taxes associated with raising capital to decline. Deregulation and globalization go hand in hand. Globalization has also spurred financial innovation. Wall Street firms have cleverly designed new financial instruments that 1) allow to avoid the constraints and costs imposed by government; 2) tailor securities to appeal to new sets of investors; 3) allow to diminish the effects of fluctuating interest and exchange rates. The result is an astonishing range of financial instruments available in the global marketplace. Information and communication technology allows many of these recent trends to take place. Securitization is the process of blending, that is, combining financial instruments that are not securities, registering the bundles of securities, and selling them directly to public (CMO’s).

Lecture 6. Financial innovations in emerging financial markets (Capital markets). Globalization of Equity markets. The pace of innovation has been remarkable given that new security designs cannot be patented, are easily copied, and once copied, their profitability to the inventor drops dramatically. To encourage such a rapid pace of innovation, successful security designs should be phenomenally profitable to the inventor for that brief period of time before competitors introduce imitations. Will the pace of financial innovation ever slow down? As long as governments continue to tax, regulate, and restrain trade, companies will devise ways to minimize taxes, reduce the effectiveness of regulations, and overcome trading frictions in the economy. Therefore, we expect financial innovation to continue, and even to expand. This lecture reviews some of institutional features of emerging financial markets and also makes comparisons with the developed ones. It describes various equity and capital markets instruments, the types of investors who hold these instruments, and the markets on which they are traded. It points out that there are many fewer types of equity securities than there are debt securities. Although equity markets are less dominated by institutions than are the debt markets, it is still the case that in the emerging markets almost half (sometimes even much more than half) of all equity securities are held by institutions. The lecture also discusses the process by which companies go public and presents concrete examples from the emerging financial markets (Avtovaz convertible bonds and Komineft zero-coupon bonds).

Part III. Governing toward "perfect financial order". International integration and new financial regimes.

Lecture 7. The evolution of the international economic and financial system. From Bretton-Woods to the present. The issues that we’ve examined so far are all important factors that affect how prosperous an international actor is and how much economics contribute to his power. How well an international economic system is crafted also influences whether an actor will experience economic prosperity, stagnation or decline, and whether political and economic stability or unrest will ensue. Realizing this, the leaders of the Western Alliance following WW-II made the construction of a productive and stable international economic system one of the most important items on their agenda. By December 1945, most states at the Bretton-Woods conference accepted plans for the post-war international economic system. The Bretton-Woods negotiations established two international governmental organizations: the IBRD, also known as the World Bank, and the IMF to undertake central banking functions for the management of international financial policy. The evolution of international economic and financial system can be divided into the following main stages: 1) Bretton-Woods and post-war arrangements of international economic and financial order (1944-1947); 2) US intervention and domination (1947-1960). International confidence in the US dollar provided the base for the international economic system of the 1950s. Confidence was assured because of the US’ vibrant domestic economy, the US’ large gold and currency reserve, the US’ commitment to convert dollars into gold, and the global reach of US economic and political power. But it changed with the times, the dollar gradually weakened. 3) Weakening of the system (1960-1971); 4) Anarchy and interdependence (1974-1995). When the 1990s opened, the international economic and financial system was interdependent and anarchic. Interdependence was easily documentable; the economies of almost every country relied on goods, products, raw materials, and information produced not only domestically, but also in other countries. Economic anarchy also was easily discernable: no international actor, it seemed, had the will nor the capability to provide greater degree of order to the international economic system. As the 1990s progressed, this picture began to change. Interdependence remained as important as before, indeed, it grew even more important. But by the mid of 1990s, international economic and financial anarchy had begun to somewhat dissipate as a degree of order began to emerge on the international scene. This was not the result of single international leadership, but rather a result of an emerging consensus in the international community that economic growth could be accelerated and economic power shared through collaborative efforts to fashion an international economic system.

Lecture 8. International monetary policy and international finance. European Integration and European monetary system. International trade is rarely undertaken on a barter basis. Rather, countries use their own currencies, or widely accepted currencies of other countries. Consequently, a standard must be established to determine the rates of exchange between different currencies. This standard is the exchange rate. The exchange rate is either 'floating' or 'fixed'. Floating rates exist when governments allow the market forces of supply and demand to determine the relative price of national currencies. Most exchange rates today are floating. By comparison, fixed exchange rates result when two or more governments agree to set the price of their currencies in relation to each other. The value of a country's exports and imports is thus determined not only by the direction and volume of trade, but also by the exchange rates. In theory, floating exchange rates over time make sure that a country's balance of payments is balanced out. Unfortunately, things do not always go as smoothly in reality as in theory.

Four problems complicate floating exchange rates. First, floating exchange rates can take a long time to correct trade and payments imbalances. Thus, a country can develop a chronic balance of trade and balance of payments deficit, sliding deeper and deeper into debt as it transfers its wealth overseas to pay for its imports. Second, for floating exchange rates to work effectively, impediments to free trade and free movements of exchange rates must be removed since such barriers continue to exist. Third, floating exchange rates encourage currency speculations. Fourth, because of uncertainties associated with a floating exchange rate, it usually discourages investment between countries. International finance is a movement of money among countries for the purpose of investment, trade, and capital accumulation.

During the last years, the international community has removed more and more barriers to the mobility of capital and other wealth. Moreover, advances in information and communication technology now enable international bankers to transfer funds electronically almost anywhere in the world in seconds rather than days. Indeed, by the 1990s, much of the world had become a single integrated financial market. The implications of the real-time integration of the global financial market are extensive. Rises and falls in a stock market can trigger rises and falls in stock markets half a world away almost instantaneously. Increases in interest rates in one country could attract investors overnight, whereas decreases in interest rates could send them scurrying around the globe to find better rates of return elsewhere. International mobility of capital is not a new phenomenon but what is new is the magnitude and speed of its mobility. The key point here is that in the end of 90s the international financial market is more open than ever before. Individuals, corporations, and governments all take advantage of this to find the best opportunities for their investments in a global financial marketplace.

Lecture 9. Main actors in the Finance arena and their role in shaping new financial order. An overview. (IMF, IBRD, IFC, MIGA, etc.) The IMF is an international organization of 183 member countries, established to promote international monetary cooperation, exchange stability, and orderly exchange arrangements; to foster economic growth and high levels of employment; and to provide temporary financial assistance to countries to help ease balance of payments adjustment. Since the IMF was established in 1946, its purposes have remained unchanged but its operations — which involve surveillance, financial assistance, and technical assistance — have developed to meet the changing needs of its member countries in an evolving world economy.

The World Bank Group is one of the world's largest sources of development assistance. In Fiscal Year 2001, the institution provided more than US$17 billion in loans to its client countries. It works in more than 100 developing economies with the primary focus of helping the poorest people and the poorest countries. The World Bank has established policies and procedures that help ensure its operations are economically, financially, socially, and environmentally sound. Bringing a mix of finance and ideas to improve living standards and eliminate the worst forms of poverty for each of its clients, the Bank works with government agencies, nongovernmental organizations, and the private sector to formulate assistance strategies. Its country offices worldwide deliver the Bank's program in countries, liaise with government and civil society, and work to increase understanding of development issues. The World Bank is owned by more than 180 member countries whose views and interests are represented by a Board of Governors and a Washington-based Board of Directors. Member countries are shareholders who carry ultimate decision-making power in the World Bank. The Bank uses its financial resources, its highly trained staff, and its extensive knowledge base to individually help each developing country onto a path of stable, sustainable, and equitable growth.

The IFC promotes private sector investment, both foreign and domestic, in developing member countries. Its investment and advisory activities are designed to reduce poverty and improve people's lives in an environmentally and socially responsible manner. Its work includes activities in some of the riskiest sectors and countries. The IFC serves as an investor and an honest broker to balance each party's interest in a transaction, reassuring foreign investors, local partners, other creditors, and government authorities. The IFC advises businesses entering new markets and governments trying to provide a more hospitable business environment, to create effective and stable financial markets, or to privatize inefficient state enterprises. Foreign direct investment is an important driver of growth in emerging economies.

MIGA's mandate is to promote foreign direct investment by offering political risk insurance (guarantees) to investors and lenders, and by providing skills and resources to help emerging economies attract and retain this investment. Projects MIGA supports typically convey many direct benefits to host countries, including jobs created for local workers; accompanying and enduring investments in skills and training for employees; and a general impact on the national economy as a whole, as provided by tax revenues and foreign exchange earnings through exports.

Part IV. Financial strategies: in the search of new targets. How to avoid financial crisis.

Lecture 10. Privatization of state equity in the CEE countries. Comparative perspective. A decade ago, with the breakup of the Soviet Union and the start of market-oriented reforms in many former socialist economies of Central and Eastern Europe, the prospect of privatizing inefficient state-owned companies figured prominently in both popular and academic writings. As the headline event symbolizing change from central planning to capitalism, privatization seemed to promise an end to the inefficiencies of central planning--the key to freeing the resources and talents of this huge area and lifting its living standards to those of the industrial countries. What broad lessons were learned from the experience of the past 10 years?

An unprecedented transformation has already occurred as these countries have moved from central planning in the direction of more competitive, market-oriented economies. Along with their successes, prominent failures have also marked this recent history, especially in Russia and in other countries of the former Soviet Union. The overall task ahead thus remains vast if the original vision of greater freedom and higher living standards is to be realized. Better understanding of what has been achieved so far in Eastern and Central Europe should smooth and speed the big changes that still must come. After a decade of transition experience in the post-socialist camp, what can now be said about the expected central role of privatization in the process? A review of the large and growing research on privatization suggests an analytical framework consisting of five themes:

  • Labors of Hercules: The size of the task is vast, and incomparably larger than any previous privatization efforts. Can it be done reasonably quickly--that is, in a decade or two?
  • The Bottom Line of Efficiency Gains: Is some privatization better than none, or more better than less? Can privatization be carried out as an isolated process, or does the government first have to prepare the playing field? Does speedy privatization work better than a slow, deliberate approach?
  • The Agency Problem (Methods of Privatization): Since owners are not in most cases able to be managers as well, the manager-agent's motivation may be a problem. Do some forms of privatization address the agency problem better than others?
  • The Dinosaurs versus Greenfields Choice: After a decade of experience, analysts now see that start-up or greenfield enterprises are an important alternative, or additional, path for increasing private sector activity. The question then arises, what is the relative importance of privatization versus the importance of businesses begun from scratch? Can dinosaurs learn new tricks once they are privatized, or is it better to let them die a slow death while relying on start-ups to build the private sector? Are there trade-offs between the two?
  • Blind Justice of Market Competition: In both the theory and practice of market economies, the advantage of private ownership stems from its profit-maximizing behavior conditioned by a competitive market environment. Can the essentials of a competitive environment be identified, providing a level playing field for all enterprises, whether start-ups, newly privatized, or still state-run?
    Although definitive conclusions on these important issues are probably still years away, consensus is forming on some of the key findings, and early indications are emerging on a number of others.

Lecture 11. Modern financial policy priorities: macro and micro-level analysis. Financial agenda and set of strategic targets: managing for a successful future (investigating case for CEE region). Since the early 1990s, most emerging financial markets have been in turmoil. Despite the adjustment policies implemented by the new governments, market confidence has not been restored, and capital flows have remained volatile. Against this background the governments have recognized the need for a further strengthening of policies. The lecture will be given on the example of Russia’s modern financial policy with some general conclusions and results. The government's strategy in addressing the present emergency contains three main elements: (i) a radical tightening of the federal budget, which intends to solve once and for all persistent fiscal imbalances; (ii) the bolstering of international reserves of the Central Bank of Russia (CBR) through access to substantial foreign financing; and (iii) the lengthening of debt maturity to reduce the vulnerability arising from the short-term structure of domestic debt. In addition, the current emergency underscores the need to accelerate structural reform with an emphasis on resolving the nonpayments problem that has dogged Russia since 1992. This statement describes the policy package underpinning the government's strategy to restore market confidence. The economic and financial policy package contains a number of up-front actions with a focus on correcting the fiscal situation and accelerating structural reforms, thus restoring financial market confidence and the prospects for sustained economic growth. At the same time, the government views current problems as providing an opportunity to gather political consensus for the economic policies needed and signal political commitment to deal with long-standing problems.

The strategy to improve the revenue situation is two-fold. First, strong measures will be taken against large tax debtors in order to signal the government's commitment to enforce the law and make taxpayers meet their statutory obligations. Second, the government will put into effect key revenue measures that will increase statutory tax liabilities while streamlining collections by removing exemptions and tax preferences. Monetary and exchange rate policies will remain unchanged. The monetary authorities will gear interest rate policy toward maintaining a stable exchange rate and increasing the level of international reserves. The CBR will refrain from offsetting the domestic liquidity impact of sales of foreign exchange that it might undertake to support the exchange rate. At the same time, the CBR will refrain from intervening in the treasury bill market to influence rates and will adjust the interest rates on its own operations in line with market conditions.

Lecture 12. Financial crisis pattern world-wide. Where it comes from? How to avoid financial crisis. The integration of financial markets around the world over the past decade has posed new challenges for policymakers. The speed with which money can be switched in and out of currencies and countries has increased with the efficiency of global communications, considerably shortening the time policymakers have to respond to emerging crises. Unhappily, financial markets are notoriously poor at spotting a crisis coming. Markets had little inkling of approaching crises in Mexico in 1994 or in Thailand in 1997. Currency traders did not increase their expectations of a devaluation in the months just before the currency collapsed in either Mexico or Thailand. Neither did interest rate differentials (the spread between domestic and overseas interest rates) widen significantly prior to the Mexican crisis. Spreads on Brady bonds and Eurobonds, instead of providing an early warning signal of worsening confidence, appear to have widened only after currency pressures were well under way. As a consequence, researchers are taking a fresh look at the forces contributing to financial crises in an attempt to develop early warning systems to signal when trouble may be brewing in currency markets.

While researchers look at many of the same economic and financial variables that most financial analysts do, their strength is that they process the information in a systematic way that maximizes their ability to predict currency and balance of payments crises, based on the historical experience of a large number of countries. Often an early warning system can translate this information into a composite measure of vulnerability. Being based on a well-defined methodology, it is less likely to be clouded by preconceptions about the expected economic performance of particular countries. An early warning system can also be a useful tool to rank the relative vulnerability of a group of countries, which is more difficult to assess on a country-by-country basis. What are the signs to watch for, and can an economic model be devised to predict accurately that an economy is nearing the danger point? Research by a number of institutions, including the IMF, the U.S. Federal Reserve, the Bank for International Settlements, and others, shows that some models are useful in predicting crises, but more work needs to be done to better understand their causes. Weakness in the financial and corporate sectors seemed to be the only common thread among the affected countries of Asia. But what made things worse was the spread of the crisis from one country to another, as investors abruptly withdrew their money. Spillovers originating in financial markets, as well as herding behavior by investors--not only in terms of joining the stampede out of a currency, but also in their propensity to shift assets out of a whole region--appear to have played an important role in the Asian "contagion."

Working out a common economic model for all these types of crises obviously is difficult. But a number of common symptoms can be identified. For example, international reserves may become dangerously low, or the level of external debt commitments become too high relative to the economy as a whole. Alternatively, movements in asset prices may follow a common pattern in anticipation of currency crises. Along with this, various fundamental data should be monitored, such as the external balance of payments of a country, and its domestic macroeconomic situation. But there are catches in this approach. For example, the level of vulnerability of an economy implied by a given level of international reserves would vary at times when investors display a generally more or less favorable sentiment toward emerging economies, or a higher or lower propensity toward contagion, or the spread of crisis from one country to another. A country may have a large volume of debt payments coming due in a given year for purely coincidental reasons, but this would not be a meaningful indicator of vulnerability if the country displays strong fundamentals and the mood in international financial markets is favorable. Conversely, a relatively high level of international reserves could be short-lived in the presence of large deficits and negative investor sentiment.

Another relevant set of symptoms may be found in international financial markets, where a change in prices may indicate increased risk. The expectation of a devaluation of a domestic currency, for example, would widen interest differentials between assets denominated in domestic and overseas currencies. If economic difficulties are foreseen, investors would also pull out of sovereign debt instruments, and possibly the domestic stock markets, and this would be reflected in widening spreads on instruments such as Brady bonds and declining equity prices. Yet these different asset prices may provide apparently conflicting signals because they are affected by different risks. This shows that it is possible to construct an early warning system that monitors different variables, but the results should be treated with caution and are open to interpretation.

The range of relevant fundamentals has broadened with the changes in international financial markets. In particular, signs of stress in the banking sector should receive more attention and should be considered along with more traditional fundamentals such as those related to the external position of the economy—including the level of the real exchange rate or the current account balance—and those describing the domestic macroeconomic situation, such as fiscal balances and credit growth.

Topics for seminar discussions:

Seminar 1.

  1. Historical time-line of the globalization process: important events and milestones.
  2. Driving forces and necessary preconditions for globalization to happen.
  3. Do we need globalization and why?
  4. Theories of economic development: evolution versus revolution.
  5. Wealth and growth: going hand in hand, or?
  6. Economic growth and economic wealth: comparative perspective from CEE region (compare three to four countries and define trends and draw conclusions for the transition period – last 10 years).
  7. What is sustainable economic growth and is it actual (relevant) for today’s outlook.
  8. Main manifestations of globalization, economic development and growth.

Seminar 2.

  1. Architecture of modern financial markets: infrastructural approach. Comparative pattern for developed and emerging financial markets.
  2. Where do we head now? Constructing the future: possible models of financial markets: which one suits most of all?
  3. Financial instruments: debate over possible range and the role of financial innovation.
  4. Debt versus equity instruments. Cross-country distinctions and similarities.
  5. Emerging financial markets: recent trends and current framework. Comparative analysis.
  6. Financial innovation puzzle. Where it comes from?

Seminar 3.

  1. Lessons from the past. Why Bretton-Woods failed?
  2. Building new financial order. Key stones in the wall.
  3. Modern financial system around the world: main pillars on which it rests.
  4. Free float versus fixed rates. Continuing debate: is there any light in the end of a tunnel?
  5. European economic (finance) integration issues: why do we need One-Europe?
  6. United Europe versus United States: economic co-partners or irreconcilable competitors?
  7. Euro-zone. Introducing new currency. Some perspectives and economic outcomes from single
  8. European currency. Why three out of the game?
  9. Establishing the hierarchy of international financial organizations: who goes first?
  10. IMF and IBRD strategic mission: what is beyond the convention.

Seminar 4.

  1. Different models and techniques of ‘going private’. Comparative perspective from emerging economies.
  2. Private versus state sector. Arguing in terms of economic and financial benefits.
  3. Financial crises world-wide: origins and regional distinctions.
  4. How to avoid financial crisis: prediction, management or elimination?
  5. Modern financial policy agenda. Cross-country comparisons and correlation patterns. Distinguishing features and similarities.

Reading list:

Mandatory (will be included in the handout package):

  1. Financial markets in transition: globalization, investment and economic growth/ Lars Oxelheim. – International Thomson Business Press, 1997
  2. Exploring financial strategy/ Gerry Johnson, Kevan Scholes. - 5th edition. Prentice Hall Europe, 1999
  3. Strategic business finance: using finance for strategic advantage/ Tony Grundy, Keith Word. - Kogan Page Ltd., 1996
  4. The Financial Times guide to Strategy. How to create and deliver useful strategy/ Richard Koch. – 2nd edition. Prentice Hall, 2000
  5. International Financial integration/ Marston. – Cambridge University Press, 1998


  1. Financial markets and corporate strategy/ M. Grinblatt, S. Titman. - Irwin/McGraw-Hill, 1998
  2. Finance for managers/ M. Murphy, J. Glynn. – ITBP, 1998
  3. Financial innovation and risk sharing/ Allen, Gale. – MIT press, 1998
  4. Privatizing Russia/ M. Boycko. - MIT press, 1999
  5. Financial optimization/ ed. by S. Zenios. – Cambridge University press, 1995
  6. Innovation, economics and evolution/ Peter Hall. – Harvester Weatsheaf, 1994
  7. The financial jungle: a guide to financial instruments/ ed. by Phil Rivett, Peter Speak. – London, 1991
  8. Globalization and history/ O’Rourke. – MIT Press, 1998
  9. Global challenges/ Sandler. - Cambridge University Press, 1999
  10. Reform in Eastern Europe/ Banchard. – MIT Press, 1999
  11. Financial-agency analysis of privatization: managerial incentives and financial contracting/ John S. Walker, J.M. Vasconcellos. – Cranbury, 1997
  12. Capital controls in emerging economies/ ed. by C. Ries, R.J. Sweeney. – Westview Press, 1998
  13. Capital flows and financial crises/ ed. by M. Kahler. – Cornell University Press, 1998
  14. Capital market development in transition economies: country experiences and policies for future/ ed. by E. Blommestein. – OECD, 1998
  15. Capital markets: institutions and instruments/ F. Modigliani, F. Fabozzi. – Prentice Hall, 1996
  16. Communicating for global competitive advantage/ M. Hart. – Conference Board, 1997
  17. Direct investment in economies in transition/ K. Meyer. – Edward Elgar Pub., 1998
  18. Economic transformation in emerging countries: the role of investment, trade and finance/ ed. by F. Contractor. – Pergamon, 1998
  19. Emerging markets: research, strategies and benchmarks/ M. Keppler, M. Lechner. – Irwin Professional Pub., 1997
  20. Financial innovations and market volatility/ M. Miller. – Basil Blackwell Inc., 1991
  21. Emerging financial markets and the role of international financial organizations/ ed. by J. Norton, M. Andenas. – Kluwer Law International, 1996
  22. Finance, investment, and innovation: theory and empirical evidence/ ed. by M. Bagella. – Ashgate, 1997
  23. Financial crisis management in regional blocks/ ed. by S. Rehman. – Kluwer Academic Publishers, 1998
  24. Foreign direct investment and economic development: lessons from six emerging economies. – OECD, 1998
  25. Foreign investment in contemporary Russia. Managing capital entry/ A. Kuznetsov. – St. Martin’s Press, 1994
  26. Global financial management/ T. O’Brien. – John Wiley, 1996
  27. Globalization of capital markets/ ed. by D. Campbell. – Kluwer Law International, 1996
  28. Global securities processing: the markets, the products/ D.M. Weiss. – NY Institute of Finance, 1998
  29. International finance: exchange rates and financial flows in the international financial system/ H. Gibson. – Longman Pub., 1996
  30. International financial markets: harmonization versus competition/ ed. by C. Barfield. – The AEI Press, 1996
  31. Capitalism: Russia’s struggle to free its economy/ Rose Brady. – Yale University Press, 1999
  32. The crisis in the Russian economy/ V. Slykov. – US war College, 1997
  33. The evolving role of finance: charting a strategic course for the future. – NY: Economist intelligence Unit, 1997
  34. The global structure of financial markets: an overview/ ed. by D. Ghosh, E. Ortiz. – Routledge, 1997

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