Capital Market Liberalization and Development by Joseph E. Stiglitz, José Antonio Ocampo

By Joseph E. Stiglitz, José Antonio Ocampo

Capital industry liberalization has been a key conflict within the debate on globalization for a lot of the former 20 years. Many constructing nations, usually on the behest of overseas monetary associations akin to the IMF, opened their capital bills and liberalized their household monetary markets as a part of the wave of liberalization that characterised the Nineteen Eighties and Nineties and in doing so uncovered their economies to elevated hazard and volatility. Now with even the IMF acknowledging the hazards inherent in capital marketplace liberalization, the vital highbrow conflict over the results of capital marketplace liberalization has for the main half ended. even though this new figuring out of the implications of capital industry liberalization is reshaping many coverage discussions between teachers and foreign associations, ideological and vested pursuits stay. serious coverage debates additionally stay, resembling how a lot govt may still intrude and what instruments can be found. even supposing capital marketplace liberalization would possibly not produce the promised merits, many economists and policymakers nonetheless fear concerning the expenditures of intervention. Do those bills exceed the advantages? What are the simplest types of interventions, below what conditions? to respond to those questions, we need to comprehend why capital industry liberalization has did not increase development, why it has ended in better instability, why the terrible seem to have borne the best burden, and why the advocates of capital industry liberalization have been so improper. Bringing jointly a number of the top researchers and practitioners within the box, this quantity presents an research of either the dangers linked to capital marketplace liberalization and the choice coverage techniques to be had to reinforce macroeconomic administration.

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38 So, capital does not necessarily flow in the direction expected by defenders of CML in many cases, it flows in the opposite direction (‘water flowing uphill’). More 37 38 One should contrast this analysis with that of the IMF study by Prasad et al. (2003). For an elaboration of this point, see Stiglitz (1989); and Lucas (1990). 17 José Antonio Ocampo, Shari Spiegel, and Joseph E. Stiglitz generally, higher risks imply that integration of developing countries into international financial markets is necessarily a segmented integration, and that the persistence of high risk premia (at least for long periods of time) is a structural effect of financial globalization, as Frenkel argues in his contribution to this volume.

For an elaboration of this point, see Stiglitz (1989); and Lucas (1990). 17 José Antonio Ocampo, Shari Spiegel, and Joseph E. Stiglitz generally, higher risks imply that integration of developing countries into international financial markets is necessarily a segmented integration, and that the persistence of high risk premia (at least for long periods of time) is a structural effect of financial globalization, as Frenkel argues in his contribution to this volume. In the paragraphs below, we trace the evidence on the relationship between capital market liberalization and capital account instability, between capital account instability—and, more broadly CML—and macroeconomic instability, and between CML and growth.

Fourth, foreign direct investors know that it might be difficult to sell their assets during a crisis, so they often use derivative products, such as currency forwards and options, to sell the local currency short as a hedge of their investment, adding to a run on the currency during a crisis. The increasing use of derivative products is, in fact, an additional source of instability, as the contribution of Dodd to this volume indicates. 40 Although the accelerated growth of derivative markets has helped to reduce ‘micro-instability’ by creating new hedging techniques that allow individual agents to cover their microeconomic risks, it might have increased ‘macroinstability’.

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