The Pile of Things to Read Grows Ever Higher

Marginal Revolution points me to YATtR (Yet Another Thing to Read):

Marginal Revolution: Are free capital movements a good idea?: The standard line is that Chile and China have avoided crack-ups -- of the sort that plagued Thailand, Indonesia, and Argentina -- by restricting the free flow of capital in and out of their country. Kenneth Rogoff and co-authors now offer a very serious 92-page look at whether such views are true. Their conclusions include:

The majority of empirical studies are unable to find robust evidence in support of the growth benefits of capital account liberalization. However, studies that use measures of de facto integration or finer measures of de jure integration tend to find more positive results. More importantly, studies using micro data are better able to detect the growth and productivity gains stemming from financial integration.

There is little formal empirical evidence to support the oft-cited claims that financial globalization in and of itself is responsible for the spate of financial crises that the world has seen over the last three decades.

The conceptual framework we present suggests that in addition to the traditional channels (e.g., capital accumulation), the growth and stability benefits of financial globalization are also realized through a broad set of “collateral benefits”...These collateral benefits affect growth and stability dynamics indirectly, implying that the associated macroeconomic gains may not be fully evident in the short run and may be difficult to uncover in cross-country regressions.

How does the argument here work? First, liberalization tends to bring growth, which offers long-term protection against crises. Banking crises tend to be more disruptive than currency crises and also tend to precede them; free capital markets are not usually at fault in those cases. Plenty of countries with capital controls have gotten into big messes. Macro-volatility has been declining as the world has become more integrated in terms of capital flows.

I wish this piece had looked at the (supposedly?) negative instance of free capital movements more closely, but still it shifted my priors [correction: posteriors] on the issue.

Comments

[Michael Carroll]

YATtR?

SUtUAP!

[andres]

Pfui. What Rogoff and others sympathetic to the IMF forget to mention is that in the 1980's and up to 1995, the IMF dismantled the most important of all the international capital controls: the risk of default and the efficiency of the hard currency risk premium in deterring additional capital flows to emerging markets. It's rather amazing that in Argentina, for example, the dollar/peso risk premium did not start to accelerate until May/June of 2001, long before it should have started doing so, and that even aferwards people who should have known better kept purchasing Argentinian bonds.

It took two huge, substantial defaults, Russia in 1998 and Argentina in 2001, for the international community to wake up and realize that the IMF was not always in a position to come to their rescue; not surprisingly, portfolio flows to developing countries have substantially decreased from their peak in the 1990's.

Capital controls are less important now than they were up to 2001 for the simple reason that without the moral hazard effect created by the IMF prior to Russia and Argentina, developing countries needed capital controls in order to deter excessive capital flows into their countries, and the resulting default/banking crises.

[Kimmitt]

I thought the current CW is that open markets magnify whatever situation you're currently in. That is, if you've got a good, rational banking regime which should engender growth, open markets will magnify that. And if you have a lousy, nonrational banking regime which is prone to boom/bust cycles, then globalization will magnify that. And if you have a passable banking regime, then globalization will help or hurt based on extremely idiosyncratic local factors.

[Jon Fernquest]

"I thought the current CW is that open markets magnify whatever situation you're currently in...if you have a passable banking regime, then globalization will help or hurt based on extremely **idiosyncratic local factors**."

This is where history comes in.

Single well-placed historical actors acting in a beneficial way can have a tremendous effect on the future.

Furthermore, both bad and good are often paradoxically mixed in equal portions in their legacies.

Take Park Chung Hee in South Korea for instance, still denegrated there, by micromanaging at a critical point in the 1970s he single-handedly navigated his country into development, or at least that is what a recent paper implies:

Yumi Horikane, The Political Economy of Heavy Industrialization: The Heavy and Chemical Industry (HCI) Puch in South Korea in the 1970s, Modern Asian Studies, 39, 2 (2005) pp. 369-397.

My problem with econ stats is that sometimes they cover up human agency. One thing driving development is foreign exchange students from developing countries in the west, they often come from elite families, and their influence once they start working in their respective countries is out of proportion to any statisitical significance they might have as individuals. The same goes for certain, but not all in country FDI.

[andres]

Pfui II. The last paragraph I wrote in the post above should read:

Capital controls are less important now than they were up to 2001 for the simple reason that _because of_ [not without] the moral hazard effect created by the IMF prior to Russia and Argentina, developing countries needed capital controls in order to deter excessive capital flows into their countries, and the resulting default/banking crises.

Just a couple of words can make such a difference if you type too fast.