Who Needs to Open the Capital Account?

by Olivier Jeanne, Arvind Subramanian, John Williamson

Overview

Most countries emerged from the Second World War with capital accounts that were closed to the rest of the world. Since then, a process of capital account opening has occurred, with the result that all developed and many emerging-market countries now have capital accounts that are both de facto and de jure open, while many developing countries also have de facto openness. This study examines this in part by considering some of the first lessons from the current global financial crisis. This crisis may change the terms of the debate on capital account liberalization in a deeper and more lasting way than any of the crises of the past two decades because it may mark a reversal in the secular trend of financial liberalization at the core of the international financial system. The current crisis also raises new questions about the appropriate policy responses to boom-bust dynamics in domestic credit and in international credit flows. Intellectual consistency is needed between the domestic and international dimensions of financial regulation and the policies aimed at dealing with boom-bust dynamics in domestic and international credit.

Product Details

ISBN-13:	9780881325119
Publisher:	Peterson Institute for International Economics
Publication date:	06/15/2011
Edition description:	New Edition
Pages:	132
Product dimensions:	6.00(w) x 9.00(h) x (d)
Age Range:	18 Years

About the Author

Olivier Jeanne joined the Peterson Institute for International Economics as a senior fellow in 2008. He is a professor of economics at the Johns Hopkins University and has taught at UC Berkeley (1997) and at Princeton University (2005–06). From 1998 to 2008 he held various positions in the Research Department of the International Monetary Fund. His research spans an array of applied and theoretical topics in international and domestic macroeconomics, including capital flows, exchange-rate regimes and currency crises, sovereign debt and defaults, international reserves, and monetary policy.

Arvind Subramanian is the Dennis Weatherstone Senior Fellow at the Peterson Institute for International Economics. He currently serves as the chief economic advisor to the government of India. He has also served as senior fellow at the Center for Global Development. His book Eclipse: Living in the Shadow of China's Economic Dominance was published in 2011. Foreign Policy magazine has named him as one of the world's top 100 global thinkers in 2011. He was assistant director in the Research Department of the International Monetary Fund. He served at the GATT (1988–92) during the Uruguay Round of trade negotiations and taught at Harvard University's Kennedy School of Government (1999–2000) and at Johns Hopkins' School for Advanced International Studies (2008–10).

John Williamson, senior fellow (retired), was associated with the Institute from 1981 to 2012. He was project director for the UN High-Level Panel on Financing for Development (the Zedillo Report) in 2001; on leave as chief economist for South Asia at the World Bank during 1996–99; economics professor at Pontifica Universidade Católica do Rio de Janeiro (1978–81), University of Warwick (1970–77), Massachusetts Institute of Technology (1967, 1980), University of York (1963–68), and Princeton University (1962–63); adviser to the International Monetary Fund (1972–74); and economic consultant to the UK Treasury (1968–70).

Table of Contents

Preface ix

Acknowledgments xiii

Introduction 1

1 Capital Flows to Developing and Emerging-Market Economies during the 2007-10 Crisis 7

Capital Flow Volatility 7

Resurgence of Capital Controls on Inflows 13

Case Study: Brazilian Capital Controls 16

2 The Case for Prudential Capital Controls 21

The "New Theory" of Prudential Capital Controls 22

Common Objections to Prudential Capital Controls 27

Distinguishing between Corrective and Distortive Capital Controls 37

Appendix 2A Effect of Capital Controls on Exchange Rates 41

3 Capital Account Liberalization and Growth 43

Snapshot of Long-Run Trends 43

Push for Capital Account Liberalization during the 1990s 45

Recent Literature 49

"Meta-Regression" Approach 51

Conducting and Presenting the Meta-Analysis 54

Results: Impact of Financial Globalization on Growth 55

Appendix 3A Tables 63

4 Specific Component Flows 79

Foreign Direct Investment 79

Portfolio Equity Investment 85

Flow of Capital from Banks 93

5 Conclusion: A New International Pact on Capital Flows 109

Need for Symmetric Rules on the Use of Capital Controls 109

Three Alternative Approaches to International Cooperation on Capital Flows 111

Fostering International Cooperation to Develop International Rules 114

References 119

Index 127

Tables

1.1 Developing and emerging-market economies, by region 8

1.2 Comparative volatility of different types of capital flows to emerging-market economies, by region, 1970-2010 14

2.1 Externalities imposed by different financial instruments in Indonesia, 1998 25

3A.1 List of countries included in meta-analysis 63

3A.2 Summary of results on financial globalization 66

3A.3 Growth and aggregated measures of financial globalization, detailed cross-sectional results 68

3A.4 Growth and disaggregated measures of financial globalization, detailed cross-sectional results 70

3A.5 Growth and aggregated measures of financial globalization, detailed panel results 74

3A.6 Growth and disaggregated measures of financial globalization, detailed panel results 76

4.1 Cross-country regression of growth on FDI inflows, 1980-2005 81

4.2 Top ten FDI underperformers 84

4.3 Flow of portfolio equity to emerging-market economies, by region, 1980-2010 86

4.4 Outflow of dividend income from emerging-market economies, by region, 1980-2010 88

4.5 Net flows to emerging-market economies, by region, 1970-2010 94

4.6 Flow of bank funds to emerging-market economies, by region, 1970-2010 97

Editorial Reviews

...very highly recommended.

Midwest Book Review