The Merrill Lynch Center for the
HOFSTRA UNIVERSITY Study of International Financial Services and Markets
FRANK G. ZARB
SCHOOL OF BUSINESS
HEMPSTEAD, NEW YORK 11549 SCOTT SKODNEK BUSINESS DEVELOPMENT CENTER
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
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
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
Dr. Linda Allen
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
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
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.
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
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
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
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
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:
Italy 119.4 •Emerging Markets
Areas of Microeconomic Belgium 117.3
Reform Canada 90.0 •International Investments
• Substantially lower tariffs; Spain 72.0
• Deregulated financial markets and Netherlands 67.9 •Derivatives
floating exchange rate; France 66.4
• 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
• 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 http://www.hofstra.edu/BDC/programs
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
INTERNATIONAL FINANCIAL SERVICES AND MARKETS
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
MARK YOUR CALENDAR
EURO Working Group on Financial Modeling of Erasmus University
Rotterdam, the Netherlands
in conjunction with
The Merrill Lynch Center
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 email@example.com.