Capital Account Liberalization and The Role of the IMF
| Pages | 321-324 |
Page 321
Recent market turbulence in Southeast Asia has again prompted concerns about the impact of capital account liberalization and whether its costs outweigh its benefits. Stanley Fischer, First Deputy Managing Director of the IMF, argues, in a paper presented at a seminar on Asia and the IMF, that countries have much to gain from liberalization. Clearly, he notes, there are dangers inherent in premature and disruptive liberalization, but these can be minimized through an orderly adaptation and strengthening of the appropriate policy and institutional infrastructures. The IMF is well positioned to assist its members with this task, and a new amendment to the IMF's Articles of Agreement will facilitate the organization's work in this area.
The following is a summary of "Capital Account Liberalization and the Role of the IMF," presented by Stanley Fischer in Hong Kong, China, on September 19, in conjunction with the World Bank-IMF Annual Meetings.
The arguments in favor of liberalization are essentially two:
* it is an inevitable step in development and thus cannot be avoided; and
* it can bring major benefits to a country's residents and government-enabling them to borrow and lend on more favorable terms and in more sophisticated markets. A country's own financial markets can grow in efficiency with the introduction of advanced financial technologies. And with better allocation of both saving and investment, economic growth can be more rapid and sustainable. This is not to dismiss the reality that with liberalization the economy will be more vulnerable to market sentiment and that market shifts-while usually rational-will be excessive at times.
Page 322
What is the right response to operating in a system that offers major benefits but may penalize mistakes severely and occasionally burden the economy with inappropriate shocks? The prime need is to avoid policies that can cause rapid capital flow reversals and to strengthen the structure of the economy and its policy framework. The importance of pursuing sound macroeconomic policies, strengthening the domestic financial system, and phasing capital account liberalization appropriately-which means retaining some capital controls in the transition-is virtually axiomatic now. More controversial are the issues surrounding the provision of information to the markets, the role of surveillance, and the potential needs for financing. Macroeconomic Policy Framework. A sound macroeconomic policy framework promotes growth by keeping inflation low, the budget deficit small, and the current account sustainable. The sustainability of the current account depends on the economy's growth rate and the real interest rate at which the country can borrow. But sustainability also entails the ability to withstand shocks. Large current account deficits-in the range of 5-8 percent of GDP and certainly any higher-should be a cause for concern. Current account deficits financed by longer-term borrowing and, in particular, by foreign direct investment are more sustainable; sizable deficits financed largely by short-term capital flows are a cause for alarm.
Better informed markets are likely to make better decisions.
It is sometimes difficult to deal with short-term capital inflows that are a response to high domestic interest rates, particularly in...
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