their economic prospects? the answer to this question seems to be “ yes. ” the major revelation - or wake - up call - that transformed the asian devaluations into first - order crises was the ( apparently sudden ) realization on the part of investors that the asian countries were suffering from deep structural imbalances, particularly in their financial sectors. this dramatic shift in sentiment was a central feature of the crisis in asia. importantly, there were no similar downside surprises in latin america, because investors were already familiar with the region ’ s structural inefficiencies and difficulties. it is fair to say that memories of the peso devaluation in 1994 - 95 remained fresh in investors ’ minds. the sudden shift in investor perceptions of the asian countries is reflected in the dramatic downgrading of sovereign debt ratings that occurred between mid - 1997 and early - 1998 ( exhibit 8 ). during this period, standard & poor ’ s downgraded thailand four notches ( from a to bbb - ), indonesia, six notches ( from bbb to b ), and korea, ten notches ( from aa - to b + ). in contrast, s & p ’ s credit ratings for argentina and mexico were unchanged during the crisis ( at bb ), and brazil ’ s rating was reduced only one notch ( from bb - to b + ). 4 the less - pronounced reversal in sentiment regarding latin america may be partially due to the fact that the crisis hit asia first. this gave policymakers in latin america an opportunity to implement pre - emptive measures, such as interest rate increases and initiatives to improve fiscal performance, that may have helped minimize subsequent damage. another implication of the difference in timing was that “ hot money ” was able to leave latin america gradually rather than in one frenetic rush. the latin american countries also may have benefited because global economic policymakers - including the imf - had learned from their experiences in asia and russia. in other words, consider the following : suppose that the asian banking systems and the latin american banking systems were asked to intermediate a similar quantity of funds. in which region would the resulting allocation of credit and level of financial sector performance be closest to the “ optimal ” outcome? the answer to this question is not immediately clear. the sovereign ratings assigned by moody ’ s moved in a broadly similar fashion. a fourth hypothesis focuses on the speed and effectiveness of the policy response. were policymakers in asia slower to respond to the crisis than

randall s kroszner : international capital flows and the emerging market economies remarks by mr randall s kroszner, member of the board of governors of the us federal reserve system, at the central bank of argentina seminar, central bank of argentina, buenos aires, 15 may 2007. * * * i am delighted to be here in buenos aires at a sister central bank, the banco central de la republica argentina. 1 the topic of my discussion today – international capital flows – is sure to be of interest to any student of argentina's economic history. as in all countries, the evolution of the argentine economy has been conditioned fundamentally by the nation's own framework of laws, policies, and social practices. nevertheless, the progression of economic developments in argentina has always been intertwined with developments in global capital markets, and that connection will likely persist as argentina continues to open up to the world economy. i will start by identifying three interrelated aspects of international capital flows in today's global economy. first, the scale of gross capital flows throughout the world is expanding, reflecting financial innovation, lowered barriers to capital movements, and a decline in what economists refer to as " home bias. " second, increased capital mobility is making it possible to finance ever larger current account deficits, and, indeed, these deficits have grown in recent years relative to the size of the global economy. finally, in the aggregate, we see that capital has been flowing, on net, from emergingmarket economies to industrial countries in recent years, the reverse of the pattern in previous decades. 2 i would like to focus on the last of these features – the flow of capital between developing and industrial countries. we will see that the aggregate data obscure important features of the flow of capital between the two global regions. after discussing various explanations for the net flow of capital to industrial countries, i will address the steps that emerging - market economies can take to enhance their prospects for capital formation and financial investment. i will also touch on changes in emergingmarket financing and how this has altered the distribution of risks in the global financial system. please note that the opinions i'll be expressing today are my own and not necessarily those of my colleagues on the federal open market committee. the scale and composition of capital flows let's begin by getting some sense of the size, source, and composition of the net capital flows that are moving from developing to industrial countries. one reasonable measure of the size of these flows is the combined