The pros and cons of liberalizing capital accounts

AuthorSabina Bhatia
PositionIMF External Relations Department
Pages354

Page 354

Capital account liberalization and its impact on growth is a subject that has, at times, sparked heated debate among policymakers. Many developing countries open up their capital accounts to help them finance growth and development with foreign savings.

But some contend that, unlike trade in goods and services, free flows of capital across borders can cause bubbles and crashes and thus undermine the domestic institutions and policies that make growth sustainable.

In an Economic Forum that closed the conference, panelists Kristin Forbes (MIT), Joaquim Levy (Inter-American Development Bank), Eswar Prasad (IMF), and Dani Rodrik (Harvard University) debated the relative merits of capital account liberalization. As Rodrik saw it, countries that have not liberalized should not rush to do so, given the scant evidence that it promotes growth and the concern that liberalization can lead to an overappreciated domestic currency that can undermine export-led growth. Furthermore, once countries have liberalized, it is difficult, he said, to "put the genie back in the bottle." Instead, Rodrik urged countries to explore the selective use of capital controls, and he called on the IMF to advise countries to undertake "intelligent capital account management."

Forbes expressed much more confidence in capital account liberalization. Opening up the capital account, she said, is...

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