The false promise of liberalisation

[MKadwa]

Something is amiss in the world of finance. The problem is not another financial meltdown in an emerging market, with the predictable contagion that engulfs neighbouring countries. Even the most exposed countries handled the last round of financial shocks, in May and June 2006, relatively comfortably.

Instead, the problem this time around is one that relatively calm times have helped reveal: the predicted benefits of financial globalisation are nowhere to be seen. Financial globalisation is a recent phenomenon. One could trace its beginnings to the 1970s, when recycled petrodollars fuelled large capital inflows to developing nations.

But it was only around 1990 that most emerging markets threw caution to the winds and removed controls on private portfolio and bank flows. Private capital flows have exploded since, dwarfing trade in goods and services. So the world has experienced true financial globalisation only for 15 years or so.

Freeing up capital flows had an inexorable logic — or so it seemed. Developing nations, the argument went, have plenty of investment opportunities, but are short of savings. Foreign capital inflows would allow them to draw on the savings of rich countries, increase their investment rates, and stimulate growth.

In addition, financial globalisation would allow poor nations to smooth out the boom-and-bust cycles associated with temporary terms-of-trade shocks and other bouts of bad luck. Finally, exposure to the discipline of financial markets would make it harder for profligate governments to misbehave.

But things have not worked out according to plan. Research at the IMF, of all places, as well as by independent scholars documents a number of puzzles and paradoxes.

For example, it is difficult to find evidence that countries that freed up capital flows have experienced sustained economic growth as a result. In fact, many emerging markets experienced declines in investment rates. Nor, on balance, has liberalisation of capital flows stabilised consumption.

Most intriguingly, the countries that have done the best in recent years are those that relied the least on foreign financing. China, the world’s growth superstar, has a huge current-account surplus, which means that it is a net lender to the rest of the world.

Among other high-growth countries, Vietnam’s current account is essentially balanced, and India has only a small deficit. Latin America, Argentina and Brazil have been running comfortable external surpluses recently. In fact, their new-found resilience to capital-market shocks is due in no small part to their becoming net lenders to the rest of the world, after years as net borrowers.

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Dani Rodrik

[downtoearth]

Something is amiss in the world of finance. The problem is not another financial meltdown in an



Among other high-growth countries, Vietnam’s current account is essentially balanced, and India has only a small deficit. Latin America, Argentina and Brazil have been running comfortable external surpluses recently. In fact, their new-found resilience to capital-market shocks is due in no small part to their becoming net lenders to the rest of the world, after years as net borrowers.

-------------------------
Dani Rodrik
i would request sumit dahiya to come and give a 35 mins lecture;););):p:)

[vijay]

i would request sumit dahiya to come and give a 35 mins lecture;););):p:)

U there Sumit ?

[dahiyarules]

The first time I saw this post, I clicked out to the next one. Now, I dont know if Vijay and Rupi actuallywant my 5 cents or just poking fun at me. :D :)

The article is poorly written and lacks statistical evidence to back its claims.

First of all, no country during the last decade has experienced true free-markets.Countrys have only experienced varying degrees of free-markets.

Countries like India and China have farily freer economies compared to the economies of Vietnam, Indonesia and Latin America.

In Thailand, companies are prohibited from remitting their profits out of the country. So, many multinationals did not setup shop in Thailand and operated from Malaysia, China or India where they created trememndous opportunities for the local population.

Fairly restricted economies of the world that did not experience the kind of growth that we did in India and China now blame it on the "false promises of liberalization."

What does the author mean by sustained growth?

Growth can be restrained by natural factors like demand and supply and government regulations.

Demand and supply are invisible self-correcting tools of the economy. Fall in demand for a particular good creates opportunity for new goods. Here, the entreprenuers come in an create employment opportunities, and thus the entire economic generator is revved up once again.

The only thing that can retard the growth of an economy while the factors of demand and supply are normal is govrnment regulations. Keynesian economists will vociferously despute my claim. But, the fact is that govenrment regulation creates monetary and non-monetary costs for both the buyers and sellers, which in turn retards economic activity.

One thing about the article that I cannot understand is what was the author smoking when he was writing the article.

The author claims that China has been developing on its own capital. It is a ridiculous claim. When China opened its markets 2 decades ago, it allowed foreign investment within its borders for the first time since the communist takeover. Even today, if you want to invest in China, you have to find a local collaborator. 100 percent foreign investment is still restricted to very few trading zones. The role of the collaborator however is more in name only. Foreign companies can invest "nearly" 100 percent as long as they have a local collaborator.

Free markets have improved the lives of millions. The wealth that was once horded in rich western country has flown into the developing world where it has created numerous opportunitis for the average people. The standard of living and prosperity in such countries has skyrocketed just over the past decade.

Free markets are what have made countries like China run positive current accounts due to all the goods and services they have been selling to the western nations.

Countries like China, India, Vietnam, Cambodia and others that were once strongly gripped by socialism have broken the grip and have realized levels of growth no one ever even dreamt of. The socialists like the author of the above article are just crying foul over spilt milk.

[priti]

Although not an economics student, it does make sense...

Talking about China not relying on foreign money?? The US had its largest foreign investments in China!!

Dont know the source of this article but it can be safely said that its crap...


The first time I saw this post, I clicked out to the next one. Now, I dont know if Vijay and Rupi actuallywant my 5 cents or just poking fun at me. :D :)

The article is poorly written and lacks statistical evidence to back its claims.

First of all, no country during the last decade has experienced true free-markets.Countrys have only experienced varying degrees of free-markets.

Countries like India and China have farily freer economies compared to the economies of Vietnam, Indonesia and Latin America.

In Thailand, companies are prohibited from remitting their profits out of the country. So, many multinationals did not setup shop in Thailand and operated from Malaysia, China or India where they created trememndous opportunities for the local population.

Fairly restricted economies of the world that did not experience the kind of growth that we did in India and China now blame it on the "false promises of liberalization."

What does the author mean by sustained growth?

Growth can be restrained by natural factors like demand and supply and government regulations.

Demand and supply are invisible self-correcting tools of the economy. Fall in demand for a particular good creates opportunity for new goods. Here, the entreprenuers come in an create employment opportunities, and thus the entire economic generator is revved up once again.

The only thing that can retard the growth of an economy while the factors of demand and supply are normal is govrnment regulations. Keynesian economists will vociferously despute my claim. But, the fact is that govenrment regulation creates monetary and non-monetary costs for both the buyers and sellers, which in turn retards economic activity.

One thing about the article that I cannot understand is what was the author smoking when he was writing the article.

The author claims that China has been developing on its own capital. It is a ridiculous claim. When China opened its markets 2 decades ago, it allowed foreign investment within its borders for the first time since the communist takeover. Even today, if you want to invest in China, you have to find a local collaborator. 100 percent foreign investment is still restricted to very few trading zones. The role of the collaborator however is more in name only. Foreign companies can invest "nearly" 100 percent as long as they have a local collaborator.

Free markets have improved the lives of millions. The wealth that was once horded in rich western country has flown into the developing world where it has created numerous opportunitis for the average people. The standard of living and prosperity in such countries has skyrocketed just over the past decade.

Free markets are what have made countries like China run positive current accounts due to all the goods and services they have been selling to the western nations.

Countries like China, India, Vietnam, Cambodia and others that were once strongly gripped by socialism have broken the grip and have realized levels of growth no one ever even dreamt of. The socialists like the author of the above article are just crying foul over spilt milk.

[priti]

I meant what Sumit has written makes sense...:o

[vijay]

I meant what Sumit has written makes sense...:o


That's why we wanted Sumit to post here. :)