(DANI RODRIK)
Something is amiss in the world of finance. The problem is not another financial meltdown in an emerging market. 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 wind and removed controls on private portfolio and bank flows. Private capital flows have exploded since, dwarfing trade in goods and services.
Freeing up capital flows had an inexorable logic - or so it seemed. Developing nations, the argument went, has plenty of investment opportunities, but is 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 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 stabilized consumption.
Most intriguingly, the countries that have done the best in recent years are those that relied the least on foreign financing. China 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.
“* The predicted benefits of financial globalisation are nowhere to be seen
* Many emerging markets experienced declines in investment rates. Nor has liberalisation stabilized consumption.
* Capital inflows tend to appreciate the domestic currency and make production in export activities less profitable "
Something is amiss in the world of finance. The problem is not another financial meltdown in an emerging market. 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 wind and removed controls on private portfolio and bank flows. Private capital flows have exploded since, dwarfing trade in goods and services.
Freeing up capital flows had an inexorable logic - or so it seemed. Developing nations, the argument went, has plenty of investment opportunities, but is 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 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 stabilized consumption.
Most intriguingly, the countries that have done the best in recent years are those that relied the least on foreign financing. China 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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