To inform, confuse, and enlighten; in economic matters as well as philosophical ones. Jørund Aarsnes and Stephan Jensen write on economics and the human condition.
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Vulnerability of Open Capital Flows: IMF and WB return to Ragnar Nurkse

According to the Washington consensus, open international capital flows were essential to developing countries in order to achieve cheap financing and efficient allocation of resources. In particular, the IMF and the World Bank were stalwart defenders of floating the exchange rate and letting the market forces determine the inflows and outflows of capital of a country.

Classical development economists, such as the Estonian Ragnar Nurkse, pointed out the fragility of relying on external financing as early as 1944 and paradoxically laid the basis for the founding of the Bretton Woods institutions (IMF and World Bank). With Bretton Woods came the managed flow of international capital, but which collapsed in 1968 and led to subsequent liberalization. In receiving aid and loans from the World Bank and IMF, developing countries were pressured to liberalize and open their economies to foreign investors.

After the Asian crisis of 1997, more attention was paid to fragility that arises when foreign investors withdraw capital and local currencies collapse. The problem is especially acute when locals have taken up loans denominated in foreign currencies, thus the depreciation causes their debts to sky-rocket. But it is first recently that mainstream economists have argued for letting developing countries control the capital inflows.

I find it very warming that both the IMF and World Bank seem to have changed tack, and returned to their more Nurksean / Keynesian roots. In this very interesting blogpost, Jamus Lim of the World Bank presents data that out of 189 major capital account liberalizations since 1970, at least 154  have led to a severe financial crisis!  He concludes by quoting a recent IMF staff paper.

Finally, the the selective use (PDF) of capital controls in a broad policy mix may be useful in helping moderate surges in portfolio inflows, especially when they are directed toward debt rather than equity. “

Striking words when coming from Washington indeed.  More depressingly though, Estonia seems to have forgotten the lessons from its premier economist.

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If you are interested in the topic of international financial fragility, the excellent work of  Jan Kregel and Hyman Minsky is recommended.

1 comment

1 The Future of Capitalism (and economics) | Evolution-Revolution { 05.28.10 at 00:21 }

[...] The second area where actual policy has been  heavily ideologically driven is development economics. More specifically, the kind of economic policies pushed on a whole range of countries by the World Bank and IMF as conditionalities and structural adjustment programs associated with various loans and aid packages in Latin America, Africa, and the former communist economies in Eastern Europe. In this policy area, changes had started happening before the financial crisis as a result of both lacking growth and a lot of smaller financial crises in a range of countries where reforms were the heaviest; as well as the counterpoint of rapid and sustained growth in countries like China and India, which have been far from implementing anything like an  IMF-style policy package. Nevertheless, the most recent – and global – financial crisis arguably made the glass spill by adding legitimacy to non-mainstream economics. The effect has been a dramatic and probably still-not-yet-over change in ideas in both the World Bank and the IMF about what constitute good and acceptable economic policy for developing/emerging-market countries. Most importantly this includes allowing governments to engage in active industrial policy, in particular to promote export growth and diversification, and prudent regulation of international capital flows. [...]

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