Search Results

This chapter begins with a discussion of the main focus of this volume, namely, the experiences of fourteen countries with external liberalization, focusing on Asian transition economies. It describes the methodology used in the studies, the effects of external liberalization, and current account liberalization. The experiences of specific countries are analyzed.

This is the second of five country case studies on income inequality, and shows that income inequality in Venezuela has significantly worsened during the past 27 years; in particular, the worsening has taken the form not of higher inequality among workers, but of higher inequality between those who own and those who do not own capital. Factor shares (shares of factors of production) have moved decisively against labour during the last three decades, resulting in a transfer of approximately 15% of GDP from labour to capital income: the data show an average worker in the late 1990s to be roughly half as well off in terms of income as an average worker in 1970. The chapter examines several possible explanations for the change in income inequality. It has six sections: Introduction; What the data say; Factor Shares, Factor Prices, and Oil Booms—an attempt to explain the evolution of factor shares on the basis of the evolution in human and physical capital accumulation; Other Influences on Income Distribution—an examination of alternative influences on factor shares; Labour's Loss of Power and the Political Economy of Inequality—an in‐depth discussion of the loss of political power by the Venezuelan labour movement and the relationship of this with the main hypothesis presented by the chapter; and Concluding Comments. The main thrust of the explanation offered is that the increase in Venezuela's income inequality can to a great extent be traced back to the decline in the country's physical capital stock and its rigid production processes, although policies such as trade liberalization, contractionary macropolicies, and capital account convertibility have made a far from negligible additional contribution.

This introductory chapter presents the arguments of the book and provides a framework for the issues related to capital market liberalization (CML). The first section addresses an important set of market failures that are likely to be significant in developing countries, and shows how they provide a rationale for state intervention in capital markets. The second section analyses the effects of capital market liberalization on developing countries, showing how the pro-cyclical nature of short-term capital flows can lead to financial and macroeconomic volatility and undermine growth. The third section introduces alternative policy options for interventions in capital markets, including direct and indirect capital controls and international regulations. The last section concludes by arguing that CML has high economic and social costs in developing countries, whereas its assumed benefits in terms of both economic stability and growth are unlikely to materialize.

Preventive capital account regulations have three potential roles in developing countries. First, as a macroeconomic policy tool they provide some room of manoeuvre for counter-cyclical macroeconomic policies, to help to cool aggregate demand and to avoid the accumulation of unsustainable debt burdens. Second, as a ‘liability policy’ they help to avoid risky corporate balance-sheet structures (excessive reliance on short-term external debts, maturity, and currency mismatches) and thus the worst effects of the volatility of capital inflows. Finally, capital controls help to avoid asset bubbles and thus prevent potential crashes. The experiences of Chilean, Colombian, and Malaysian regulations on capital inflows indicate that they fulfilled those key aims. However, the macroeconomic effects depended on the strength of the regulations and tended to be temporary. The basic advantage of the price-based instrument used by Chile and Colombia was its non-discretionary character, whereas quantity-based controls in Malaysia proved to be stronger in terms of short-term macroeconomic effects.

This chapter examines the growth and distributional impacts of Malaysia's policy of maintaining open current and capital accounts. Malaysia's external liberalization policy initiatives are described. Malaysia's external liberalization experience is then analyzed, followed by an assessment of the macroeconomic impact of external liberalization à la Berg and Taylor (2000). The socio-economic impacts of external liberalization are dealt with in the following section. The final section provides a more detailed discussion of certain aspects of external liberalization, focusing on international trade, foreign direct investment, international finance, intellectual property rights, and international economic governance.

This chapter examines the determinants and nature of China's capital inflows. Section 11.2 presents a detailed picture of the evolution of China's capital inflows. Section 11.3 examines the evolution of the balance of payments and dissects the recent surge in the pace of accumulation of international reserves. Section 11.4 discusses the broader composition of China's capital inflows in the context of the burgeoning literature on financial globalization. Section 11.5 examines various hypotheses that have been put forward to explain why China has its inflows so heavily tilted toward foreign direct investment (FDI). In this context, a detailed description of China's capital account restrictions and how these have evolved over time are provided. While controls on non-FDI inflows as well as tax and other incentives appear to be proximate factors for explaining the FDI-heavy composition of inflows, other factors may also have contributed to this outcome. It is not straightforward to disentangle the quantitative relevance of alternative hypotheses. It is argued that at least a few of the hypotheses — including some mercantilist-type arguments that have been advanced recently — are not consistent with the facts.

This chapter recommends a broad concept of macroeconomic stability, whereby ‘sound macroeconomic frameworks’ include not only price stability and sound fiscal policies, but also a well-functioning real economy, sustainable debt ratios, and healthy public and private sector balance sheets. These multiple dimensions imply the use of multiple policy instruments. The chapter elaborates a framework for developing countries that involves active use of countercyclical macroeconomic policies (exchange rate, monetary, and fiscal), together with capital management techniques (capital account regulations and prudential rules incorporating macroeconomic dimensions). It also explores the role of international financial institutions in facilitating developing countries' use of countercyclical macroeconomic policies.

This chapter argues that financial liberalization introduces a new problem: Now the real exchange rate, which is the relative price between nontradable and tradable, becomes a source of instability. It goes up in a boom, squeezing profits, which limits borrowing and hence investment and brings the economy down. The fact that the economy is open to capital inflows may actually make things worse, since it allows investment demand to grow very fast in a boom.

Because of technological advances in terms of communications, and because of the liberalization of capital accounts, private capital flows experienced rapid growth at the end of the 20th century across developing economies. This final chapter looks into the differences between the capital flows to Asia and Latin America that seem to have gained much importance during the earlier years of this study rather than in 1990s. Analyzing the scale and the prominent characteristics of global private capital flows aids in identifying the key elements involved in managing capital flows and policy making procedures especially in developing countries. Also, this chapter attempts to provide a comparison of the various policy responses implemented by different developing countries in addressing such issues.

This chapter notes the special role of financial services in an economy and distinguishes policy reform from domestic deregulation and capital account deregulation. The impacts of policy reform and the benefits and risks of broader financial sector development, growth, income distribution, and poverty are discussed. The impacts of reform include: increased domestic competition; causing further reform and greater regulatory transparency; increased resiliency of the domestic financial system to shocks; encouragement of the diffusion of new skills, products and technologies; and facilitation of access to international capital. The elements of successful trade-policy reform are noted, based on the experiences of China, Thailand, and Latin America. Issues in need of additional research are identified, including the impact on domestic financial performance of foreign equity participation, improvement of available data on and transparency of barriers to cross-border transactions and foreign entry, measures used to moderate unanticipated impacts of liberalization, and further elucidation of the rationales for the WTO Financial Services Agreement (FSA) commitments. The role of international negotiations is addressed in terms of how they can help individual countries, what can be learned from international rules and commitments undertaken, whether there is scope for improvement, whether existing commitments promote desirable policies, possible reasons for refraining from commitments, and issues in need of further research. An addendum reviews the liberalization of financial services in the Western Hemisphere and in China.

Economic policy in developing and post‐socialist economies during the last 10–15 years of the 20th century had one dominating theme: packages aimed at liberalizing the balance of payments, on both current and capital accounts. Together with large but highly volatile foreign capital movements, this wave of external deregulation was the central feature of globalization for the nonindustrialized world. In two recent research projects, the implications of external liberalization have been investigated through the use of quantified narrative histories for a number of countries, based on a methodology developed by the author to decompose and analyse changes in effective demand, productivity growth, employment, and the sectoral/functional income distribution over time; one of these studies concentrates on countries in Latin America and the Caribbean, while the other includes Argentina, Colombia, Cuba, India, South Korea, Mexico, Russia, Turkey, and Zimbabwe. After a summary of the results of the studies, with possible interpretations, the chapter develops a model of the likely effects of liberalization. The decomposition methodologies are then presented, and used to check the outcomes that the model generates; a substantial overlap is shown between observed phenomena and the model projections, and this discussion leads naturally to policy alternatives and suggestions about the future course of the liberalization process.

This chapter examines the implications of the liberalization of capital outflows in China, India, Brazil, and South Africa (CIBS) for other developing countries. It focuses on their prospects of attracting not only foreign direct investment (FDI), but also portfolio capital flows from CIBS. To inform the discussion, two steps are taken: first, in order to identify the type of capital flows that might come from CIBS, the chapter briefly describes capital account liberalization measures undertaken by CIBS to date and future intended liberalization. Second, it maps geographic distribution of outward FDI and foreign portfolio investment in the recent past, which are taken as possible predictors of future flows. The chapter shows that portfolio investment goes mainly to OECD countries and offshore financial centres, and only a small share to developing countries. But, within developing countries, CIBS' neighbouring countries have shown a greater ability to attract this type of investment, compared with other developing countries.

This is the third of five country case studies on income inequality, and investigates the impact of financial liberalization and the rise of financial rents on income inequality in Turkey. The chapter has five sections: Introduction; Indicators of Income Distribution: The Evidence—a broad overview, and evidence on the patterns of income distribution in Turkey over the last three decades; Macroeconomic Adjustment under Financial Liberalization and the Rise of Financial Rents—a discussion of the evolution of functional categories of income that includes an account of the macroeconomic adjustment; The Rising Fiscal Gap and the Role of the State in Regulating the Distributional Structure—a detailed analysis of the rise in public sector deficits and the distributive consequences of the widening fiscal gap; and Concluding Comments and Overall Assessment. Sect. 3 looks at the inherent tensions caused by the macroeconomic disequilibria embodied in the process of integration with world markets under conditions of a poorly supervised banking system and underdeveloped and fragile domestic asset markets; here, it is found to be analytically convenient to decompose the path of Turkish liberalization after 1980 into two major subperiods partitioned by the strategic step of capital account deregulation—which took place in 1989 and was completed by the full integration of the domestic market into global financial markets. This section also studies the patterns of the wage cycle and productivity growth using quantitative filtering techniques, and reports on the disassociation of labour remunerations from the productivity gains in the real sphere of the economy.

Sovereign wealth funds are designed to solve specific economic and financial problems. Surplus capital inflows, primarily from commodity dependent states, threaten to cause currency appreciation and increase inflation. This chapter will focus on the economics of sovereign wealth funds and the common policy dilemmas facing these countries. Drawing upon the extensive economics literature focusing on commodity dependent states, this chapter focuses on why do sovereign wealth funds exist, what problems are they designed to solve, and how well do sovereign wealth funds address these problems. Contrary to popular belief, sovereign wealth funds are not political creations, but were created for economic reasons to address specific economic problems and are created in countries with very specific challenges. Countries with large current account surpluses, primarily from natural resource exporting, need to stabilize their inflows and investment patterns to smooth volatile commodity prices. The impact of these structural inflows has not been considered and what economic policies might better suit countries with surpluses has not been fully considered in the sovereign wealth fund debate. This chapter will study, in non-technical language, sovereign wealth funds and the unique set of economic issues faced by their domestic economies.

This chapter summarizes how thinking about capital flows and their management has evolved in both policymaking and academic circles. Many advanced economies used restrictions on capital inflows for prudential purposes—even as they pursued financial liberalization more broadly—until the 1980s, when capital account restrictions began to be swept away as part of broader liberalization efforts. Likewise, many emerging markets that had inflow controls for prudential reasons dismantled them when liberalizing domestic financial markets and controls over outflows. That the use of capital controls as a means of managing inflows is often viewed with suspicion may be partly a “guilt by association” with outflow controls and exchange restrictions. Historically, these have been more prevalent and more intensive, and their purpose has been to prop up authoritarian regimes or poor macroeconomic policies, often affecting both current and capital transactions.

This chapter traces the origin of the term ‘Washington Consensus’ to a paper written for a conference in 1989 that aimed to explore how the set of ideas accepted as a basis for policy in developing countries had changed. Ten policies — covering the areas of macroeconomic discipline, microeconomic liberalization, and opening up the economy (globalization) — were asserted to be widely believed in Washington as widely needed in Latin America, and the conference papers were intended to explore the extent of agreement with those propositions in the region. The term subsequently evolved: while some people continued to use it in the original sense, it has also been identified with IMF/World Bank policies (and thus used to embrace capital account convertibility and the bipolar exchange rate doctrine as well as institution-building and anti-corruption policy) and with a belief in market fundamentalism. The chapter argues that this is a very different usage with little support (and certainly not consensus support) in Washington. It concludes by emphasizing that the reforms listed in 1989 are not adequate for the present day, and outlines desirable directions in which to supplement them.

The IMF reform programs for the crisis countries did not have a well-defined roadmap to guide the formulation and implementation of stabilization policies, financial and corporate restructuring, and institutional reforms. The most important reason for this ineffectiveness was the IMF’s failure to recognize the crisis as a capital account crisis. This led to a wrong diagnosis, thus a wrong prescription.

This chapter reviews Brazil's experience with capital controls. In spite of the significant progress in terms of capital account liberalization and currency convertibility attained since the early 1990s, current regulations continue to be cumbersome and complex. The debt accumulation pattern and the profile of external financing substantially changed since liberalization of the capital account and the floating of the currency. Net financial flows have financed current account deficits. Moreover, sudden stops are more pronounced when the crisis is mostly domestically driven. The strong capital controls system did not prevent capital flight. Sudden stops involve both the interruption of capital inflows and an increase in outflows. Foreign direct investment (FDI) flows tend to be more stable and less correlated to the other flows. Liberalization of the capital account in the last fifteen years has provided more convertibility to the currency.

This study updates Christian’s (2010) human capital account for the United States to the year 2009, refining the underlying data and putting the account into international context by reviewing applications in the rest of the world. It also measures the sensitivity of human capital measures to alternative assumptions about income growth rates, discount rates, the treatment of taxes, smoothing and imputation of labor force and school enrollment data, and the valuation of non-market time. It concludes with an application to the measurement of the output of the education sector.