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					                                                      The Merrill Lynch Center for the
HOFSTRA UNIVERSITY                                    Study of International Financial Services and Markets
                                                      SUMMER 2000                                                    VOL.3 NO.1

 A Message From the Co-Directors ...
 Esmeralda O. Lyn, Ph.D. and George J. Papaioannou, Ph.D.                                                             CONTENTS
 A few months ago the financial sector entered          The newly emerging stock markets and trad-                   OF   T HIS I SSUE
 the new millennium with several forces and             ing systems seem to pursue strategies that will
 trends challenging its traditional structures. As      establish them as superior outlets in either the
 usual, the underlying drivers are technology           primary or the secondary markets. Thus, stock
 and deregulation. Financial institutions are           exchanges that are interested in listing stocks
 rethinking the effectiveness of their business         structure their criteria so as to attract firms
 models due to the phenomenal growth of                 with specific profiles and attributes. Stock
 online securities trading and other financial          markets and trading systems primarily inter-        Message from
 services. This new channel of delivery of finan-       ested in attracting trading volume adjust their
 cial products, along with deregulation (espe-          order execution processes so as to minimize         Co-Directors . . . . . . . .Page 1
 cially the repeal of the Glass-Steagall Act in the     costs and offer investors access to multiple
 United States) and further cross-border liberal-       sources of liquidity and price quotes.
 ization of financial services are changing the
 terms of national and global competition and           Several interesting observations can be made
 are giving rise to a significant consolidation of      in the context of these developments:               Message from
 the financial services sector through mergers            • It is becoming more obvious that listing
 and alliances.                                             on an exchange and trading exclusively          Editor     . . . . . . . . . . . .Page 2
                                                            on the same exchange is a thing of the
 This upheaval has not even spared the rather               past. It appears that the screening,
 staid world of stock markets. That stock                   monitoring and certification of stocks
 exchanges would be thrust into the pit of com-             through listing will remain in the              Mismatches, Lags and Conflicts:
 petition is remarkable testimony to the power              domain of responsibilities of the
 economic laws have in forcing organizations                organized exchanges, but trading will be        Some Observations After the
 toward efficiency as a condition for survival.             conducted through the most efficient
 Both in the United States and Europe, new and              trading systems.                                World Bank/IMF Meeting . . . .
 technologically adept market and trading sys-            • The emergence of new stock markets is
 tems are challenging the supremacy of tradi-               fueled by the tremendous need to raise           . . . . . . . . . . . . . .Pages 3 ~ 4
 tional stock markets that had enjoyed hereto-              capital for startups and enterprises that
 fore the status of national institutions.                  would otherwise be left out of market-
                                                            based financing. Thus, these new mar
 In the United States the challenge to the New              kets with their flexible listing criteria are   The Asian Crisis-The Australian
 York Stock Exchange and Nasdaq has come                    becoming engines for providing venture
 from the electronic communications networks                capital through the mechanism of                Experience . . . . . .Pages 5 ~ 7
 (also called ECNs), which serve as trading                 public financing.
 platforms for retail and institutional investors.        • The interests of retail and institutional
 In Europe the highly-fragmented stock market               investors seem to converge toward three
 has created conditions for multiple forms of               priorities: rapid execution of orders, low      Past and Future Activities
 competition. On one level, new electronic                  cost trades, and access to information
 trading systems like Tradepoint, E-Crossnet                about price quotes.                             Report: 1998-2000 . . . .Page 8
 and Nasdaq-Europe, are aiming at facilitating            • The power of the Internet, which has
 the pan-European trading of stocks. On anoth-              the potential to unify markets into
 er level, either independently or as offsprings            bigger super- and supra-national
 of established national stock exchanges, sever-            markets, is contributing, for now at
 al stock markets have emerged or are in the                                                                International Conference
                                                            least, to the fragmentation of the
 planning stage with the purpose to cater to                national securities markets.
 new and growth-oriented companies. Such                                                                    Nov. 16-18, 2000,
 markets include Easdaq, Nouveau Marche                 As the competition among stock markets
 (Paris), Neuer Markt (Germany), EuroNM                 intensifies and the proliferation of trading        New York City . . . . . . .Page 8
 (Belgium), Nieuwe Markt (Amsterdam) and                venues continues, academics and policy mak-
 Nouvo Marcato (Italy). Finally, the major              ers have to ponder what the implications are
 European national stock exchanges themselves           for the two basic properties of securities mar-
 are competing in an effort to be the first to          kets, namely, price discovery and liquidity.        The Merrill Lynch Center
 establish true pan-European trading systems.           Although it seems at the moment that other
 The most notable example in this case has              imperatives, such as offering direct access to      Mission Statement:
 been the joint effort of the London and                secondary market trading to investors and           Established to promote and facilitate fac-
 Frankfurt Stock Exchanges to lead an eight-            public market financing opportunities to new        ulty and student study in the field of
 member alliance that would have included the           ventures, may be driving the competition and
 Paris Bourse among other markets. Having               emergence of stock markets, eventually it will      international financial services and mar-
 made very little concrete progress toward that         be their ability to facilitate trades at the best   kets and to communicate knowledge to
 goal, the next move belonged to the Paris              prices and with maximum liquidity that will
 Bourse which, in alliance with the Amsterdam           determine their long-term survival.                 the academic and business communities .
 and Brussels Stock Exchanges, formed the
 Euronext earlier this year.

A Message From the Editor ...
Professor Gioia P. Bales, Merrill Lynch Center Coordinator

The dynamic changes that have occurred          Appropriately, the Merrill Lynch Center
in the financial markets in recent years -      closed, and then opened the millennium,
and their profound effect on institutions       with two programs on technological               BUSINESS ADVISORY BOARD
and markets - have been the catalysts           advancements and their implications for
behind the many informative programs            global finance. In December 1999, a panel        Panayiotis Athanassopoulos, Ph.D.
                                                                                                 Chairman, Managing Director
offered by the Merrill Lynch Center. Our        discussion titled "Financial Information         Toyota Hellas, Greece
programming will continue to explore the        Technology" featured professionals from
important themes and questions that are         ECN, OPENLINK Financial, Hyperfeed               Sallyanne Ballweg
relevant in today's global markets.             Technology and Money Line. In March              Vice President, Team Leader
                                                2000, Evan Misshula, managing director of        Chase Manhattan Bank
Clearly, the most profound event in the         Sane Capital Partners, discussed broad-          Richard Bernstein
history of the financial markets during the     band and wireless technologies and the           Chief Quantitative Strategist
past 100 years is the European Monetary         companies that are poised to take advan-         Merrill Lynch & Co., Inc.
Union and the introduction of the Euro          tage of this exciting, new technology.
                                                                                                 James L. Cochrane
currency. It has implications on many                                                            Senior Vice President
facets of global business. In May 1999, the     In addition, on May 10 the Merrill Lynch         New York Stock Exchange
Merrill Lynch Center hosted a one-day           Center in conjunction with the Hofstra
seminar on the challenges faced by U.S.         University Scott Skodnek Business                Russell J. Da Silva
businesses and investors in this radically      Development Center hosted "The Strategic         Partner
                                                                                                 Christy & Viener
altered environment. The program com-           Impact of Mergers in the Financial Sector."
menced with an executive breakfast, host-       We were proud to welcome Mr. John                John Finnerty, Ph.D.
ed by the Scott Skodnek Business                Morris, managing director of Salomon             Partner
Development Center at Hofstra University,       Smith Barney as our keynote breakfast            PricewaterhouseCoopers
which featured Ernest T. Patrikis, special      speaker. This was followed by panel dis-         Coleman Fung
advisor to the chairman of American             cussions featuring leading representatives       Chairman
International Group. This was followed by       of the Federal Reserve, European American        OPENLINK Financial, Inc.
two panel discussions, which explored           Bank, and Hofstra and New York
                                                                                                 Lane Grijns
issues in pricing, marketing and invest-        Universities. The program closed with a          Partner
ment strategies, and opportunities and          talk by Mr. John J. Conefry, Jr., vice chair-    BNY Capital Markets, Inc.
issues in treasury operations and financial     man of Astoria Financial Corporation on
reporting.                                      the effect of mergers on medium/small-           Gerald Hassell
                                                sized banks.                                     President
                                                                                                 Bank of New York
                                                                                                 Dennis D. Jurs
                                                                                                 Group Senior Vice President
                                                                                                 Corporate Banking
    Merrill Lynch Center Hosts Conference                                                        European American Bank
                                                                                                 Walter T. Molano, Ph.D.
    on the Impact of Mergers in the                                                              Director, Research
                                                                                                 BCP Securities, Inc.
    Financial Sector                                                                             Kenjiro Nagasaka
                                                                                                 Banyu Pharmaceutical Co., Ltd.
    On May 10, 2000, The Merrill Lynch                                                           Japan
                                                Nelson, vice president and counsel of the
    Center of the Frank G. Zarb School of       Federal Reserve Board, addressed cross-          Howard Smith
    Business, in conjunction with the Scott     selling of financial services. In session        Executive Vice President, CFO
    Skodnek Business Development Center,        two, Mark Anderson, executive vice pres-         AIG, Inc.
    hosted a one-day conference titled "The     ident of EAB, and Nicholas Economides,           Salvatore F. Sodano
    Strategic Impact of Mergers in the          professor at New York University's Stern         Chairman and CEO
    Financial Sector." The program com-         School of Business, explored electronic          American Stock Exchange
    menced with an executive breakfast, fea-    commerce and other technology-driven
    turing keynote speaker John Morris, man-    strategies utilized by financial institutions.   George L. Van Amson
    aging director of Salomon Smith Barney,     After lunch, John J. Conefry, Jr., vice          International Equity Sales & Trading
    who spoke of the macro aspects of finan-    chairman        of    Astoria      Financial     Morgan Stanley Dean Witter & Co.
    cial sector mergers.                        Corporation, discussed the effect of con-
                                                solidation on small- and medium-sized            Susumu Yoshida
    The breakfast was followed by three panel   banking institutions.                            General Manager
                                                                                                 Sumitomo Chemical America, Ltd., Japan
    discussions. In session one, Simon
    Moules, executive vice president of HSBC-
    Investment Services Division, and Michael

Mismatches, Lags and Conflicts: Some Observations
After the World Bank/IMF Meeting

The following remarks were given by Eugene          leveraging was the rule and quite difficult to      guaranteed their market adversaries; and e)
Rotberg at a seminar hosted by the Merrill          understand, let alone monitor or regulate.          they, indeed, did not even use the same kind of
Lynch Center at Hofstra University on                                                                   leveraged products in conducting their rate
November 18, 1998.                                  • Communication. The growth of communi-             stabilizing activity. Not a happy situation for
                                                    cation systems let everyone know what all           Central Banks.
Mr. Rotberg is an adviser to governments,           markets and participants were doing and see-
international institutions and the private sec-     ing at the same time. That, in turn, narrowed       • Financial engineering. It gave great advan-
tor on matters dealing with reserve manage-         spreads between buyers and sellers. However,        tage to first-users. More important, the prod-
ment, interest and exchange rate volatility,        the high volumes became destabilizing when          ucts were complex, leveraged, not readily
the regulation of financial markets, and on         markets responded to the same information.          understood by senior managers or regulators,
privatization and direct investments in devel-      The increased volumes, therefore, did not           and off-balance sheet, which meant that they
oping countries. He previously held the posi-       reduce price volatility given the immediacy of      were and are often "unrecorded" by anyone,
tions of vice president and treasurer of the        the information flow. It increased it. It is a      electronically transmitted with unknown or
World Bank for 19 years.                            myth that increased liquidity and volume            uncertain risk, and not readily subject to tra-
                                                    reduces volatility. Increased liquidity merely      ditional accounting or risk management sys-
                                                    narrowed the financial difference between           tems.
My remarks today are divided into several           buyers and sellers - a rather unimportant eco-           Such was the environment. Such is the
parts: first, a reminiscence of financial devel-    nomic event - except for the profit pressures       environment.
opments worldwide during the last several           on the intermediaries who were pushed inex-
decades and their implications and, second, a       orably into alternative ways of achieving a         THE RESULTS
summary and assessment of major issues that         decent return on capital in an increasingly
troubled policy makers and government offi-         volatile and competitive environment.               • All of this was in the context of little exper-
cials in the recently concluded World                                                                   tise by policy makers in the workings of a
                                                    • Disintermediation. Money market funds vs.         rapidly changing and complex market;
Bank/IMF annual meetings. Let's start with the      bank deposits; commercial paper vs. loans;
past.                                               short-dated governments vs. C.D.s; securitized      • Tremendous unrecorded access to capital by
                                                    mortgages vs. bonds; syndicated loans vs.           virtually any government or the private sector
THE PAST                                            bonds. That meant that each product and             borrower in the world;
                                                    financial intermediary "cannibalized" the
• Floating exchange rates. At first the world       worldwide savings base.                             • Disparate legal and property rights world-
was fixed. Then the Yen rose from 360 to the                                                            wide;
dollar to 300; to 240 to 200; deteriorated to       • An accommodating accounting system.
300 then revalued to 80; then devalued to 150       That permitted failure and risk to stay undis-      • Little corporate governance and social safety
yen to the dollar and recently improved to the      closed because of the practice throughout the                  nets in emerging markets;
120s - with many changes of direction in            world of not marking assets to market -
between. That volatility, which occurred in         despite their depreciating value.                   • Huge disparities in the liquidity of certain
many currencies, created the incentive to spec-                                                                 instruments as compared to others;
ulate or hedge on potential exchange rate           • An asymmetrical compensation system.
movements - or if possible, to cause them.          That permitted risks to be taken by managers        • Highly uncertain risk management controls.
                                                    and traders with potential asymmetrical
• Volatile interest rates. In the United States,    rewards for getting it right with minimal           The results should not have been unexpected:
long-term interests moved 1 percent in the          downside penalty for loss.
period 1955-1965. Since then, long-term rates                                                           • An S&L crisis in the United States;
have moved from 7% to 15%; down to 8%;              • Government insurance of bank funding
rose to 12%; and now are below 5%. Short-           sources. In the United States, indeed, all over     • Excessive or imprudent lending by banks;
term dollar rates have fluctuated between 3%        the world, governments insured the depositors       • Currency crises in Mexico, Western Europe,
and 20% and everywhere in between. That             while deregulating how the deposits could be                 Russia;
volatility also created a potential for profit by   used. That removed the depositor/creditor as a
speculating on interest rate movements.             constraining influence over the deployment of       • Orange County, Barrings, Long-Term
                                                    assets as governments permitted an even wider       Capital;
• Huge shifts in savings. Governments in the        range of investments and activities for banks.
last 20 years, with little previous precedent,      In short, the liability side of the balance sheet   • Korea, Malaysia, Indonesia.
permitted the tapping of domestic savings by        was nationalized; the asset side alone was pri-
non-resident borrowers and issuers of equity        vatized. Bad news.                                  It is the context of these troublesome
alike. Similarly, those seeking capital - debt                                                          events that we recently concluded the
and equity - had the freedom and risk to go         • Direct government intervention in foreign         World Bank/IMF meetings in September
outside their borders - indeed, outside their       exchange and credit markets. That meant a           1998.
currency for capital.                               force would directly intervene in the market,
                                                    instead of as a profit-driven player, it was a      The recent World Bank/IMF annual meeting
• Deregulation of financial intermediaries.         politically driven player - therefore a potential   provided, yet again, an opportunity to hear
Deregulation lets everyone in everyone else's       patsy for the private sector. Moreover, com-        what the assembled heads of state, finance
traditional line of business. In industrialized     bined with depositary insurance, it meant that      ministers, planning ministers and Central
countries, insurance companies, banks, pen-         banks, for example, could now speculate on          Bank governors were worried about. It also
sion funds and securities firms were permitted      the value of a currency - in an adversarial posi-   provided insights into what problems were
to compete for savings between end buyers           tion against their own government or Central        under their control, which were contentious
and sellers, both domestically and worldwide.       Bank with the government locked into making         and which were simply too painful to be dis-
They offered remarkably similar products.           political, not financial, decisions. Yet the        cussed. The fact is that the world's financial
                                                    banks' funding for such activity was, if not        system is now subject to events and conditions
• Lowest-common-denominator regulatory              financed (and they often were), guaranteed by
and supervisory controls. If a financial inter-                                                         that cannot be coped with at this time by
                                                    those same governments. Governments, there-         either national governments or multilateral
mediary could not offer particular services         fore, found that a) they were in an adversarial
because of national controls, it moved its oper-                                                        organizations. There are simply too many mis-
                                                    position to their banks; b) they didn't have the    matches, lags and conflicts between the prob-
ation to a more accommodating environment.          resources of the private sector in conducting
Or, if the site became too intrusive, financial                                                         lems and the "solution." The comments below
                                                    FX activity; c) they were making political, not     reflect the speakers' consensus in the meetings
institutions shifted to a different product, say,   market-based decisions; d) they funded and
foreign exchange trading or derivatives where                                                           and my own observations.
                                                                                                                                    (continued on page 4)
Mismatches, Lags and Conflicts: Some Observations
After the World Bank/IMF Meeting (continued from page 3)

SHORT-TERM CAPITAL FLOWS                             where adverse impact was swift and without            resources. Instead, privatization and stock
Consensus: They were dangerous and should            recourse. Moreover, the availability of liquid        markets came first - the icing on the cake
be monitored and controlled.                         and leveraged instruments on the debt and             before the cake was baked.
                                                     currency side encouraged market players to
• Perhaps fundamental is the mismatch                engage in transactions whose very volumes             INFORMATION FLOW
between the expertise of the private financial       would prove destabilizing when withdrawn.             Consensus: There should be more transparen-
market participants and the policy makers in                                                               cy of data and policies. These should be quick-
the public sector. There is no regulatory or         SOCIAL SAFETY NETS AND TRAUMA                         ly disseminated.
supervisory agency in any country, including         Consensus: Safety nets are required. They are
the United States, which fully and comfortably       not in place.
understands, for example, how leverage is                                                                  • There was a lot of schizophrenia about
accomplished, in what volumes, with what             • Financial and political traumas in recent           "information" flow. The mantra was clear.
participants and products, the nature of the         years, and particularly in the last six months,       Policies and data must be transparent and cur-
collateral and the minute-to-minute shifts of        have occurred in response to rapid and severe         rent. But the consensus was hedged. The IMF
positions by the players. It was not meaning-        currency attacks and flight of short-term capi-       and World Bank should facilitate timely publi-
ful, therefore, to talk about monitoring, let        tal from the credit markets. The immediate            cation of public sector data but without
alone controlling or regulating the activities, of   effects were currency devaluation, extremely          breaching the confidentiality of the informa-
say, hedge funds (which at least a dozen             high interest rates and collapse of financial         tion provided to those institutions! Moreover,
finance ministers suggested) without an              intermediaries whose investments or loans             few officials recognized that the better the
underlying detailed knowledge as to how              depreciated in value. It occurred with such           quality and immediacy of information given
leveraging and complex derivatives actually          speed that there was little coping mechanism          the speed of its dissemination, the greater the
work in the private sector. The public sector        in the form of social safety nets to cushion the      probability for sharp and volatile price move-
does not have that knowledge base.                   adverse economic outcomes from unpre-                 ments as each market participant, in response
                                                     dictable financial events.                            to adverse information, would seek to leave
• Governments also are mismatched in their                                                                 through the same door. Fundamentally, free,
use of derivatives in their attempts to stabilize    • The absence of social safety nets reflected the     open, transparent and immediate information
currencies as compared to private sector play-       mismatch between the rapid privatization of           was mismatched with the absence of safety
ers. As a result, their lack of sophistication not   productive enterprises as compared to the lag-        nets in the event of adverse economic or finan-
only inhibits their regulatory posture, but also     ging attention paid to pensioners, those on           cial outcomes from the quick dissemination of
inhibits effective market response by a central      fixed incomes, unskilled workers, the unem-           such information.
bank when it attempts open-market currency           ployed or unemployable.
support using inefficient and awkward instru-                                                              PRUDENTIAL LENDING
ments against the leveraged instruments used         • The fundamental debate between that part of         Conclusion: Banks should be required to be
in the private sector.                               a society, in emerging markets, which takes           more careful in their lending.
                                                     pride in "market efficiency" (downsizing,
• There is also a mismatch between the sheer         reduction of subsidies, low minimum wage) to          • It was clear that the need and availability of
volume of transaction flow, much of it elec-         obtain a comparative trade advantage vs. the          capital far outstripped the rules for prudential
tronically transmitted, and the monitoring or        concern over safety nets (minimum wages,              lending. Again, here too, the social/political
recording of such transactions within a given        standards of employment, food and housing             structure did not have the time to create a sys-
country, let alone globally across borders. The      subsidies, unemployment compensation) has             tem of checks and balances, a sharing of power
reason is because the private sector players         not been joined. That, in turn, reflected the         and responsibilities so necessary as a condition
either have no recording obligation, or the          absence of a political consensus as to the role       precedent to the establishment of formalized
data is not centralized and certainly not coor-      of government in providing health and educa-          rules and guidelines. The simple truth was that
dinated across national borders. While Central       tional programs or other support systems vs.          emerging markets in many cases were opened
Bank governors and finance ministers fell all        supporting through tax policies or otherwise          quickly to receive capital, before the political
over each other supporting the need for con-         private investments that have positive cash           economy had a consensus for the establish-
straints (they called it sequencing) over            flow. There is little wonder that the social safe-    ment of the rules of wise, ethical and correct
volatile (speculative) flows, it was clear they      ty nets were not in place, let alone those that       financial and corporate behavior. That takes
didn't have the vaguest idea of how to do so         are automatic and quick acting. The reason            time and rarely can be accelerated by either
without shutting down their access to                they are not in place is simply because in most       flat, market forces or outside consultants. The
resources.                                           emerging markets there has not yet developed          mismatch between the ease of allocating capi-
                                                     the basic social contract as to the roles of labor,   tal and the absence of a social consensus, in
• Virtually every official commented on the          owner, manager and government. And with-              certain countries, has dangerously pushed cer-
volatility of the short-term financial credit        out that consensus the perceived easier path is       tain countries to the brink of a centralized,
flows in their country, and the severe impact        to control the perceived "causes" of the trauma       closed environment.
on interest rates and currencies when capital        - the speculative or short-term capital flows -
was quickly withdrawn. Few, however, noted           though they have neither the understanding of         Conclusion: The talk about safety nets, pover-
the mismatch between those flows and the             those markets, nor the infrastructure to moni-        ty alleviation, the rule of law, cross-border
lethargic, bureaucratic and often hostile atti-      tor, let alone regulate them.                         controls and corporate governance had a
tude toward direct foreign equity investment.                                                              vaguely unreal quality about it. One sensed
As a result, governments have created incen-         • Related to the foregoing is the mismatch            the reluctance of each speaker to admit that
tives to investing short, liquid and as a credi-     between the private sector (and the availabili-       the fundamental coping mechanisms were not
tor rather than as a long-term, less liquid equi-    ty of capital to support that sector) vs. the         yet there because of an absence of political
ty investor. That comes from dealing with            quality of corporate governance, the rule of          will/maturity that simply could not keep up
financial institutions rather than the corporate     law, and the existence of a predictable tax sys-      with or respond to the huge cross-border
sector. That tilt, in turn, reflected an underly-    tem. Here, too, the highest officials in scores of    financial flows that so drastically affected
ing hostility in a number of countries to a con-     countries referred to the need to address these       them. Also, even if the political will were
cern over the potential for losing indepen-          matters. But the reason they have not been            there, one sensed that nation states simply
dence and patrimony to foreign ownership of          addressed, again, is because the countries have       did not have the capacity to understand, pre-
commodities and natural resources. The result        not developed into a mature, political econo-         dict or respond to this new variable - cross-
was bound to create substantial pressure in the      my in which the major competing constituen-           border financial flows in the debt and curren-
alternative investment vehicles - the debt and       cies have fought and resolved highly con-             cy markets - which dwarfed their domestic
currency markets where, as noted above, the          tentious battles. The compromises have not            economy.
official sector was at a decided disadvantage,       been reached. Those compromises are precur-
their monitoring tools least advanced and            sors to establishing a division of power and

The Asian Crisis -                                                                                         ACADEMIC ADVISORY BOARD
The Australian Experience                                                                                  Dr. Reena Aggarwal
                                                                                                           Georgetown University
                                                                                                           Dr. Linda Allen
                                                                                                           Baruch College
The following remarks were made by Neil               Table 2
Mackrell, Chief Representative, New York                                                                   Dr. Erlinda S. Echanis
Representative Office, Reserve Bank of                                                                     University of Philippines
Australia, at a seminar held at Hofstra                         Real GDP Growth:                           Dr. Lawrence Goldberg
University on April 23, 1999. Mr. Mackrell                       Asia and Pacific                          University of Miami
was joined by Mr. Bo Yung Chung, Chief
Representative, Bank of Korea, speaking on                        Year to latest                           Dr. Gabriel Hawawini
"Korean Crisis: Causes, Consequences and                                                                   INSEAD
Prospects"; Mr. Esmond Lee, Chief                     China                                       9.6      Dr. Anthony Saunders
Representative, Hong Kong Monetary                    Australia                                   4.7
                                                                                                           New York University
Authority, speaking on "Hong Kong:                    United States                               4.3
Currency Stability and Recovery Prospects";           Taiwan                                      3.7      Dr. Lemma W. Senbet
Mr. Raymond W.M. Fan, Director, Hong Kong             Canada                                      2.8      University of Maryland
Economic & Trade Office, speaking on "Hong            Philippines                                 -0.2
                                                      New Zealand                                 -0.7     Dr. Jaap Spronk
Kong's Economic Ties with Mainland China."
The seminar was organized by Dr. Zhongjun             Singapore                                   -0.8     Erasmus University
                                                      Japan                                       -3.5
Hao, C.V. Starr Chair of International                Korea                                       -6.8     Dr. Nickolaos G. Travlos
Business of the Frank G. Zarb School of               Hong Kong                                   -7.0     University of Pireaus
Business.                                             Malaysia                                    -8.6
                                                      Indonesia                                   -19.6
My aim today will be to outline Australia's                                                                The following Hofstra faculty serve as
experience, and the ongoing structural and           region. The real growth rate of 4.7% over the         the Merrill Lynch Center Associates
policy adjustments that we believe have been         year to last December was a lot stronger than         for the 1999-2000 period:
so important to us during this turbulent period.     any of us had forecast, particularly given the
                                                     pressures that were being felt by our trading         David Flynn, Ph.D.
I would like to start by taking a slightly longer-   partners. We had been expecting a noticeable          Management and General Business
term view. During the first nine years of the        slowdown and we still are, but at this stage we       Tao Gao, Ph.D.
decade of the 1990s, a period that includes          are still raising our growth forecasts for 1999.      Marketing and International Business
some recessionary periods for each of the
                                                     The other main comparison to draw against             Robert Guttmann, Ph.D.
  Table 1                                            economic growth during the 1990s is to look           Economics
                                                     at the rate of inflation (see Table 3). During the
                                                     first nine years of this decade, Australia's infla-   Zhongjun Hao, Ph.D.
          Real GDP Growth                            tion rate has averaged 2.8% per year, which is        Marketing and International Business
         Average annual rate                         slightly higher than the OECD average. But            Qi Huang, Ph.D.
                                                     still in the range of 2 to 3% that the Reserve        Finance
          (past nine years)                          Bank specifies as Australia's inflation target. If
                                                     the first two years (1990 and 1991) were              Nancy Huckins, Ph.D.
  Ireland                                    6.8
  Norway                                     3.5      Table 3                                              Steven Krull, Ph.D.
  Australia                                  3.2                                                           Finance
  Netherlands                                2.8          Consumer Price Inflation                         Laura Lally, Ph.D.
  United States                              2.5
  Denmark                                    2.5
                                                           Average annual rate                             Business Computer Information Systems
  Germany                                    2.2             (past nine years)                             and Quantitative Methods
  Spain                                      2.2                                                           Keun Lee, Ph.D.
  New Zealand                                2.1
                                                      Japan                                       1.3      Marketing and International Business
  Canada                                     1.9
  United Kingdom                             1.9      Belgium                                     1.9      Cheryl Lehman, Ph.D.
  Belgium                                    1.9      France                                      2.0      Accounting
  Japan                                      1.8      Canada                                      2.2
  France                                     1.7      Sweden                                      2.2      Susan Malley, Ph.D.
  Finland                                    1.3      Denmark                                     2.2      Finance
  Italy                                      1.3      Ireland                                     2.4
  Sweden                                     1.1      New Zealand                                 2.5      Rusty Mae Moore, Ph.D.
  Switzerland                                0.8      Norway                                      2.6      Marketing and International Business
                                                      Netherlands                                 2.6
                                                      Finland                                     2.7      James Neelankavil, Ph.D.
countries in the comparison, Australia has            Switzerland                                 2.7      Marketing and International Business
grown faster than other comparable OECD               Germany                                     2.7
                                                                                                           Ehsan Nikbakht, Ph.D.
countries.(see Table 1) Only Ireland and              Australia                                   2.8
                                                      United States                               3.3      Finance
Norway have done better, but taken together
                                                      United Kingdom                              4.0      Anoop Rai, Ph.D.
they are about half the size of Australia, and        Italy                                       4.5
there are some special circumstances about                                                                 Finance
                                                      Spain                                       4.9
each of them.                                                                                              Elaine Sherman, Ph.D.
                                                                                                           Marketing and International Business
Of course, these figures are averages over nine      deleted from that comparison, the inflation
years. Table 2 looks at growth in the latest year    rate would be about the average for OECD              K.G. Viswanathan, Ph.D.
(1998) particularly in those countries in Asia       countries.                                            Finance
and the Pacific Rim. The story is well known
to you by now, but nevertheless the figures do       Naturally enough, this rather sanguine view of        Cheryl Wade, J.D.
not paint a pretty picture. Many of the coun-        Australia's experience since the Asian crisis         Law
tries have experienced an actual contraction in      began is the net effect of the wide range of          Edward Zychowicz, Ph.D.
their levels of income. Apart from China,            actions, reactions and adjustments within our         Finance
which remains a relatively closed economy,           country to the pressures that were brought to
Australia recorded the strongest growth in the       bear on us. We do not know with any preci-
                                                                                (continued on page 6)
The Asian Crisis -
The Australian Experience (continued from page 5)

sion all the reasons as to why the Australian          capital. It can only be increased by using labor
economy has performed so well during such a            and capital more productively. Again, there is
difficult period (and I note in passing that Mr.       an analogy to current productivity perfor-
Greenspan in recent testimony has expressed            mance of the U.S. economy.
similar sentiments about the performance of                                                                 The Associates are the backbone of the
the United States economy). However, we do             Public finance has been another important            Merrill Lynch Center, representing
think that a lot of the credit can be traced to a      aspect in Australia's body of economic
                                                       reforms; and an area where the reforms               Hofstra faculty from a wide range of
range of broad-based and quite fundamental
economic and structural reforms that were              were put in place in time to help shield our         disciplines. Each of our 19 Associates is
implemented during the preceding decade.               economy from external pressures. On com-
                                                       parable OECD figures, our budget was in sur-         committed to contributing to the study
Many of these are ongoing reforms that are
aimed at further strengthening our institutions        plus to the tune of 1/2% of GDP in 1998 and          of one specialization within the field of
and our competitive capabilities.                      a bigger surplus is expected in 1999.                international financial services and
Macroeconomic policy, particularly mone-               Perhaps a better measure of the long-run effect      markets. Their responsibilities include:
tary policy, and including our exchange rate           of fiscal policy can be taken from the ratio of      maintaining current familiarity within
policy, has played a major role in recent              general government debt to GDP.(see Table 5)
times. Fiscal policy reforms have also been            This effectively measures the accumulated            their area, preparing one review paper
important. But the microeconomic influ-                debt that is needed to finance them. On this         every two years and initiating pro-
ences, many of which show up in height-                measure, Australia's public finance has result-
                                                       ed in the smallest call on capital markets of        grams - such as seminars and sympo-
ened competition and greater flexibility,
have been very important(see Table 4). They            OECD countries.                                      siums - to further enhance and expand
help to explain not only Australia's move to a                                                              the knowledge and understanding in
lower inflation environment but also the econ-         Table 5
omy's growth and resilience in the face of                                                                  their areas.
external contraction.                                     General Government Debt
                                                           Percent of GDP, 1998                             Specializations include:
    Table 4
                                                       Italy                                      119.4         •Emerging Markets
        Areas of Microeconomic                         Belgium                                    117.3
                                                       Japan                                      99.9
                Reform                                 Canada                                     90.0          •International Investments
                                                       Sweden                                     73.1
    • Substantially lower tariffs;                     Spain                                      72.0
    • Deregulated financial markets and                Netherlands                                67.9          •Derivatives
     floating exchange rate;                           France                                     66.4
                                                       Germany                                    62.6
    • Stronger prudential supervision of               Denmark                                    59.3          •Law and Regulation
     financial institutions;                           United States                              57.4
    • A more stringent regime of competition           United Kingdom                             57.2
     policy;                                           Ireland                                    56.6          •Information Technology
                                                       Finland                                    52.5
    • Privatization of many public utilities;
                                                       New Zealand                                37.6
     and                                               Norway                                     37.1          •International Economics
    • A good deal more flexibility in wage             Australia                                  37.0
     bargaining.                                                                                                •Marketing of Financial
                                                       Reform of the banking system and its regu-                Services
These have all contributed to making the               latory environment greatly strengthened
economy more efficient and more flexible and           our financial institutions ahead of the gen-
thereby more competitive and more resiliant.           eral turmoil in financial markets. This was              •International Banking
But of course in the short run, they also had          also important in shielding our real economy
their costs. For example, there is always an           from much of the financial woes of the last two
increase in uncertainty in an economy when             years. As the consequences of the asset boom             •Accounting for
change, and at times rapid change, is occur-           earlier this decade were unraveled, bad loans             International Markets and
ring and there are often job losses involved           reached a peak of 6% of assets in 1992 but it
such as when a large, overstaffed utility is pri-      has come down pretty much continuously                    Services
vatized. But there are also large benefits that        since that time. At present, the ratio is less
are often undervalued such as cheaper elec-            than 1%, and this is probably about as low as
                                                       it could reasonably be expected ever to get. In          •Management and
tricity, cars, telephone calls, airline flights, new
export industries and new jobs in the compet-          other words, Australia had significant prob-              Organization of Financial
itive industries. Australia has seen both sides        lems in its banking system at the beginning of            Services
of this coin.                                          this decade along with a lot of other countries.
                                                       But the bad loans were run off relatively quick-
Perhaps the best quantitative indicator that           ly, and bank balance sheets in Australia have            •International Investment
these structural reforms have yielded good             been particularly strong throughout the period
results is that the economy is now more                of the Asian crisis. New institutional arrange-           Banking
productive than ever. The increase in pro-             ments have also been introduced recently to
ductivity in the current expansion, at 1.9%, is        strengthen further the regulatory environment
a good deal better than the figures we had in          in which our financial institutions operate.
the expansions of the 1970s or 1980s. This fig-
ure is for multi-factor productivity, a measure        The subject of the current account deficit
of productivity that cannot be increased sim-          and the level of external debt tended to dominate
ply by shedding labor and replacing it with            economic discussion in Australia in the 1980s.
                                                                                    (continued on page 7)
The Asian Crisis -
The Australian Experience (continued from page 6)

There were fears that Australia's current            from year to year, it has been basically a flat
account position might be unsustainable. At          trend. Looking at the Australian dollar against
that time there was a large fall in the real         other major currencies, we get a similar pic-
exchange rate and a number of other adjust-          ture. The Aussie dollar against the Yen shows
ments had to be made including a substantial         the same pattern but perhaps with a very slight
tightening in fiscal policy.                         downward slope. Looking at the Aussie dollar
                                                     against the U.S. dollar, again the same pattern
With the benefit of hindsight, it is now clear       but on this occasion the long-term, flat line
that the situation was not unsustainable.            trend is probably appropriate.
Australia's current account deficit as a percent-
age of GDP has tended to oscillate between           Turning now to the more recent develop-
about 3% to a little more than 6% over the last      ments, over the last two years, the value of the
two decades. It is obviously very strongly           Australian dollar has obviously depreciated.
cyclical and on four occasions it widened to         The depreciation against the U.S. dollar looks
around the 6% mark. We have been expecting           to be quite pronounced partly because the
that it would do the same on this occasion           U.S. dollar has been quite strong; the depreci-
because of the contraction in our traditional        ation in trade- weighted terms looks more
export markets and our own relatively buoy-          modest because the Australian dollar has risen
ant domestic demand. It is somewhat surpris-         against some Asian currencies that have been
ing that it has not happened although we             relatively highly weighted in the index. If we
would not be surprised if it did happen at           look over the whole period of nearly two
some stage. Unfortunately, the only sure way         years, we think that the Australian currency
of preventing such an outcome would be to            has behaved in a reasonably exemplary fashion
slow the Australian growth rate and nobody           although there were a couple of periods where
wants to do that. It would be poor economic          it threatened to overshoot.                            Award for Best Occasional Paper
policy, and unhelpful for regional recovery.                                                                    The Merrill Lynch Center invites
                                                     To sum up, the Australian economy has                  academics to submit papers, which
It is interesting to consider what has hap-          responded surprisingly well to pressures               will be included in the Center’s
pened to our exports since mid-1997:                 that produced such havoc in parts of Asia              Occasional Paper Series. We are inter-
                                                     and beyond. Our economy has rarely per-
• exports to those countries in Asia that were       formed better than it is right now. Macro-eco-         ested in papers that cover significant
hit initially by the crisis (ASEAN and Korea)        nomic policy and fiscal reform have been               new developments in the financial ser-
have fallen by 16%;                                  important. But in the decade leading up to the         vices sector and/or markets of nation-
• exports to the rest of Asia have been rela-        Asian crisis, Australia implemented broad-             al or regional economies outside the
tively flat;                                         ranging, and at times painful microeconomic            United States Interdisciplinary topics
• but on the other hand, exports to Europe are       reforms that virtually transformed the econo-          are welcome. An award of $500 will
up by 18%, to the United States by 24%, and          my, giving it the flexibility, resilience, integrity   be given to the best paper submitted
to other markets by 13%.                             and competitive ability that have enabled us to        each academic year. For inquiries,
                                                     withstand the recent turmoil and come out all          contact the Co-Directors of the
Over the years we have often felt ourselves to       the stronger.
be vulnerable because such a high proportion                                                                Center.
of our exports are commodities. But as we
have seen, in the situation of a regional crisis,
this can be an advantage.
Let me return to the issue of sustainability of
our external position. The level of Australia's
foreign debt rose from almost nothing to about
35% of GDP in five years in the mid-1980s.                    If you would like additional information
This caused a lot of concern at the time as peo-
ple tended to assume this sharp upward trend                     regarding the Merrill Lynch Center,
would continue. In the event, the sharp rise in                         please contact us at:
this ratio flattened out and it is currently about
the same as it was in 1992 and not a lot high-
er than in the mid-1980s. The mathematics is
such that by holding the current account                                          Scott Skodnek
deficit fairly constant as a proportion of GDP   ,                   Business Development Center, Room 240B
the foreign debt ratio does not rise forever but
tends to flatten out at a new level, and this is                              145 Hofstra University
what has been happening.
                                                                         Hempstead, New York 11549-1450
Exchange rate management is always a top-
ical issue in a country with an open econo-
my such as Australia's. To see how the devel-                       Telephone: (516) 463-3005/5703/5141/5345
opments have affected our exchange rate, I
think it is appropriate to firstly give a medium-                              Fax: (516) 463-4834
term perspective before turning to develop-
ments since the Asian crisis occurred.
If we look back over the last 20 years or so,                  For an updated list of our programs, visit us at our Web site:
there has been only one major change. That                   
was a downward shift in the real exchange rate
that occurred in 1985/86, which I referred to
earlier. But since then, while it has moved
quite a lot from quarter to quarter and even

                                    THE MERRILL LYNCH CENTER
                                         FOR THE STUDY OF
                                                    PAST AND FUTURE
                                             ACTIVITIES REPORT: 1998-2000

             October 1-3, 1998                                          May 5, 1999
             "Financial Services in the Evolving Global                 "The Euro and Its Impact on U.S. Business"
             Marketplace: Approaching the Next Millennium"              Lecture by Ernest T. Patrikis, special advisor to the
             Three-day international conference.                        chairman, American International Group, at the busi-
             October 30, 1998                                           ness executive breakfast jointly sponsored by the
             The Long Term Capital Management Debacle:                  MLC and the Hofstra University Scott Skodnek
             Lessons and Implications"                                  Business Development Center.
             Faculty panel discussion.                                  "The Impact of the Euro: U.S. Firm Operations and
             November 18, 1998                                          Investors"
             "The World of International Finance: A New Role for        Symposium with panel presentations by faculty,
             the World Bank/IMF?"                                       investment, banking and business speakers.
             Lecture by Eugene H. Rotberg, former vice president        December 10, 1999
             and treasurer of the World Bank and former execu-          "Financial Information Technology"
             tive vice president of Merrill Lynch & Co.                 A panel discussion featuring professionals from
             March 26, 1999                                             ECN, OPENLINK Financial, Hyperfeed Technology
             "The Global and Legal Impact of the Y2K Problem"           and Money Line.
             Seminar by Dr. Laura Lally and Mr. Charles Kerr,           March 17, 2000
             partner, Morrison & Foerster, LLP  .                       "Broadband and Wireless Technologies -- What are
             April 23, 1999                                             they? Who are the public and private companies
             "Asia: The Road to Recovery"                               poised to take advantage of this tectronic shift?"
             Panel presentation by the chief representatives of the     Presentation by Evan Misshula, managing director,
             Bank of Korea, the Reserve Bank of Australia, the          Sane Capital Partners.
             Hong Kong Monetary Authority, and the director of          May 10, 2000
             the Hong Kong Economic and Trade Office.                   "The Strategic Impact of Mergers in the Financial
                                                                        Presentation by John Morris, managing director,
                                                                        Salomon Smith Barney.
                                                         November 16-18, 2000
                                                         International Conference
                                                                (see below)

                                               MARK YOUR CALENDAR
                    EURO Working Group on Financial Modeling of Erasmus University
                                    Rotterdam, the Netherlands
                                                            in conjunction with
                                                   The Merrill Lynch Center
                                                      Hofstra University
                                                   will host an international conference

                                                     November 16, 17 and 18, 2000
                                                      Yale Club of New York City

    The EURO Working Group on Financial Modeling was founded in September 1986 in Lisbon. Its primary field of interest is
    financial models that solve problems faced by financial decision makers in the firm, intermediaries and the investment community.
    From this, the following objectives of the EURO Working Group are derived:
    • Providing an international forum for exchange of information and experience on financial modeling;
    • Encouraging research in financial modeling (new techniques, methodologies, studies, software, etc.);
    • Stimulating and strengthening the interaction between financial economic theory and the practice of financial decision making;
    • Cooperating and exchanging information with other universities and financial institutions throughout Europe.
    The EURO Working Group now has members in 34 countries spread across four continents. The meetings of this organization
    are attended by 80-100 members on average, most of them scientists, but also representatives from financial institutions, and are
    usually organized on Thursday, Friday and Saturday morning. The organizers are expected to schedule three types of sessions: a
    round-table session with invited speaker(s), regular sessions with the presentation of refereed papers and balloon sessions in
    which unrefereed papers, new topics and "loose" ideas can be discussed.
    For information regarding the EURO Working Group contact:
    Helene Molenaar, Erasmus University, at


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