Financial account liberalizations since the second half of the 1980s paved the way for the burgeoning literature that investigates foreign exchange market efficiency in emerging markets (EMs) via testing for the uncovered interest parity (UIP) condition. This paper is the first to provide a broad and critical survey on this recent literature. Specifically, we attempt to answer the following questions. First, are the EMs different from the developed economies in the context of the UIP condition? Second, to what extent can these differences contribute to the debate on the UIP literature? Third, what are the empirical challenges specific to the EMs in testing for the UIP condition?
Financial globalization offers both risks and benefits for countries of the semi-periphery or the so-called "emerging markets". Politics within the national space matters, yet acquires a new meaning, in the age of financial globalization. "Weak democracies" are characterized by limited accountability and transparency of the state and other key political institutions. Such democracies tend to suffer from populist cycles, which result in low capacity to carry out economic reform. Financial globalization, in turn, magnifies populist cycles and renders their consequences more severe. Hence "weak democracies" are confronted with the predominantly negative side of financial globalization which includes over-dependence on short-term capital flows, speculative attacks and recurrent financial crises leading to slow growth and a more regressive income distributional profile. The relevance of these set of propositions are illustrated with reference to the case of Turkey which, indeed, experienced recurrent financial crises in the post-capital account liberalization era with costly consequences for the real economy. Two general conclusions follow. Firstly, there is a need to strengthen democracy in the developing world. Secondly, since this is hard to accomplish over a short space of time serious question marks are raised concerning the desirability of early exposure to financial globalization given the current state of the world.
Recent episodes of financial crises in emerging markets progressively highlighted the importance of a sound and well-functioning banking sector for macroeconomic stability and sustainable economic growth. The Asian crisis of 1997, in particular, drew attention to the fundamental role that a deficient banking system could play in terms of generating major financial crises with devastating repercussions on the real economy and with significant possibilities of contagion in an emerging market context. The recent twin economic crises experienced by Turkey in 2000 and 2001 illustrated in a rather dramatic fashion the strong correspondence between a poorly functioning and under-regulated banking system, on the one hand, and the sudden outbreak of macroeconomic crises on the other. Indeed, the Turkish experience shows that both public and private banks can contribute significantly to the outbreak of economic crises. In retrospect, it may be argued that private commercial banks played an instrumental role in the first of the twin crises experienced in November 2000, whilst, public banks emerged as the central actors in the context of the subsequent crisis of February 2001.
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