Abstract
Financial markets have, increasingly, taken the center of development objectives. This has been a major factor in the fast rise of financial activity, with finance taking the lead in economic globalization.
There is increasing consensus that different aspects of a globalized economy have different effects on growth, investment and jobs. While there is agreement that trade has net positive effects on growth and jobs (though there are important issues about how trade liberalization is performed, degree of contribution to growth, and distribution of gains and losses), there is increasing evidence that, in contrast, capital account liberalization and unfettered capital flows, especially short-term and reversible ones, may have negative effects on growth, jobs and income distribution. Furthermore, the view emerged that excessive liberalization of the capital account, without regulation, may undermine rather than support trade growth.
Economists concerned with maximizing growth and employment are increasingly concerned with the macroeconomic instability and harm that financial capital flows and ensuing currency crises pose as well as distortions, for example via instability of exchange rates, that deter growth and exports value-added.
This chapter looks at the evolution of these ideas and the empirical evidence. It examines recent debates around capital account liberalization. The 2012 “institutional view” of the IMF is examined, which favors capital account regulations, and their contradiction with WTO and, especially bilateral trade deals. It calls for an aggiornamento of WTO and bilateral trade provisions. Focusing the analysis in emerging economies, this chapter examines why financial capital flows tend to be intrinsically pro-cyclical, overshooting in the boom and the bust. It discusses implications of structural heterogeneity among different economic agents which in combination with real macroeconomic instability, is regressive and depresses development, owing to negative effects on capital formation, quality of exports and jobs.
We thank José Antonio Ocampo for his very insightful comments and suggestions.
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Notes
- 1.
This alternative framework, beyond the IMF position, is the result of an academic debate that took place while IMF Board discussions were going on. See a full collection of contributions to this debate inGallagher et al. (2012), particularly on guidelines for the design of capital account regulations (CARs) as an essential part of the macroeconomic policy tool kit and not seen as measures of last resort.
- 2.
Calvo and Mendoza (2000) examine how globalization can spur contagion by discouraging the collection of information, as it creates stronger incentives to imitate the portfolio of the market. This introduces an information asymmetry, now between market “leaders” and “followers”.
- 3.
A systematic distinction between potential GDP and actual GDP would allow this faulty interpretation to be avoided, being an essential component of a development-oriented macroeconomic policy.
- 4.
Since economic authorities must take care of the sustainability of macroeconomic balances, it appears “irrational” and perverse that these authorities might follow the advice of “rational” financial investors. Naturally, these pursue their own short-term aims, which often are inconsistent with the long-term aims of financial and macroeconomic stability that should be pursued by government economic authorities.
- 5.
The concept of structural heterogeneity has been developed by theEconomic Commission for Latin America and the Caribbean (ECLAC), departing from the more standard concept of dualism. For instance, see Rodríguez (2007).
- 6.
For instance, for average Latin America, during most years since the early 1980s, there is evidence of significant recessive gaps during most time of over one-third of a century. See an estimate of the output gap (recessive gap) in ECLAC (2010, figure II.9).
- 7.
- 8.
See the relevant, rather critical, analysis of the standard formal inflation targeting approach developed in a staff paper produced in the IMF (Blanchard et al. 2010).
- 9.
The counter-cyclical policy in Chile was comprehensive only until early 1996. Several researchers do not take notice of this gradual policy change. Since 1996, the exchange rate appreciated, with rising stock of external liabilities and deficit on current account. When the Asian crisis exploded in 1998, it caught Chile with those (pro-cyclical) macroeconomic imbalances (Ffrench-Davis 2010a, chapter VIII).
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Ffrench-Davis, R., Griffith-Jones, S. (2019). Financial Globalization and Its Implications for Development. In: Nissanke, M., Ocampo, J.A. (eds) The Palgrave Handbook of Development Economics. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-14000-7_20
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