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Abstract
Weighing up the costs and benefits of economic interdependence in a finance-driven world from a development perspective, this book argues that globalization, understood and promoted as absolute freedom for all forms of capital, has been oversold to the Global South, and that the South should be as selective about globalization as the North, rebalance domestic and external sources of growth, and better manage integration into unstable international finance.
‘Liberalization, Financial Instability and Economic Development’ brings together a range of essays from Yılmaz Akyüz’s recent work, refuting the myth that emerging economies have now successfully decoupled from the North and have become new engines of growth. The book challenges the orthodoxy on the link between financial deepening and economic growth, as well as the relationship between the efficiency of financial markets and the benefits of liberalization. Rather, Akyüz’s work urges developing countries to use all possible tools to control capital flows and asset bubbles in order to prevent financial fragility and crises, and recommends regional policy options while recognizing the challenges posed by the institutional structures already in place.
“Yılmaz Akyüz is one of the most innovative thinkers in development economics whose insights have contributed to a much richer understanding of the opportunities and challenges of globalization in developing countries. At a time of increasing global instability, if we fail to listen to his advice, we do so at our own peril.” —Diego Sanchez-Ancochea, University of Oxford
Yılmaz Akyüz is chief economist at the South Centre, an intergovernmental think tank for developing countries based in Geneva, Switzerland.
Weighing up the costs and benefits of economic interdependence in a finance-driven world, this book argues that globalization, understood and promoted as absolute freedom for all forms of capital, has been oversold to the Global South, and that the South should be as selective about globalization as the North. ‘Liberalization, Financial Instability and Economic Development’ challenges the orthodoxy on the link between financial deepening and economic growth, as well as that between the efficiency of financial markets and the benefits of liberalization. Ultimately, the author urges developing countries to control capital flows and asset bubbles, preventing financial fragility and crises, and recommends regional policy options for managing capital flows and exchange rates.
Table of Contents
| Section Title | Page | Action | Price |
|---|---|---|---|
| Liberalization, Financial Instability and Economic Development | i | ||
| Half title | iii | ||
| Copyright | iv | ||
| CONTENTS | vii | ||
| INTRODUCTION | 1 | ||
| Notes | 14 | ||
| References | 14 | ||
| Part One LIBERALIZATION, STABILITY AND GROWTH | 17 | ||
| Chapter I FINANCIAL LIBERALIZATION: THE KEY ISSUES | 19 | ||
| A. Introduction | 19 | ||
| B. Interest Rates and Savings | 19 | ||
| C. Financial Liberalization and Deepening | 22 | ||
| D. Allocative Efficiency | 24 | ||
| 1. Market failure | 24 | ||
| 2. Successful intervention | 25 | ||
| 3. Measuring efficiency | 26 | ||
| E. Productive Efficiency and Cost of Finance | 27 | ||
| 1. Risk, uncertainty and interest rates | 28 | ||
| 2. Intermediation margin | 28 | ||
| F. Regulation of Finance and Financial Stability | 29 | ||
| 1. Risk taking by banks | 29 | ||
| 2. Prudential regulations | 30 | ||
| 3. Interest ceilings | 31 | ||
| G. Options in Financial Organizations | 32 | ||
| 1. Bank-oriented and market-oriented finance | 32 | ||
| 2. Efficiency of alternative systems | 33 | ||
| 3. Requirements for an efficient bank-oriented system | 35 | ||
| 4. Control and regulation of stock markets | 36 | ||
| H. External Liberalization and Financial Openness | 37 | ||
| 1. The concept of financial openness | 37 | ||
| 2. The extent of financial openness in developing countries | 37 | ||
| 3. Nature of capital flows | 38 | ||
| 4. Recent capital flows to Latin America | 40 | ||
| 5. Opening stock markets to nonresidents | 41 | ||
| 6. Effects of volatile capital flows on investment and trade | 42 | ||
| 7. Controlling capital flows | 43 | ||
| I. Conclusions | 45 | ||
| Notes | 47 | ||
| References | 47 | ||
| Chapter II MANAGING FINANCIAL INSTABILITY IN EMERGING MARKETS: A KEYNESIAN PERSPECTIVE | 51 | ||
| A. Introduction | 51 | ||
| B. The Keynesian Instability Hypothesis and Financial Cycles | 52 | ||
| C. Investment and Jobs over the Financial Cycle | 55 | ||
| D. The Policy Problem | 56 | ||
| E. Capital Flows and Countercyclical Monetary Policy | 59 | ||
| F. Reserve Accumulation as Self-Insurance | 61 | ||
| G. Financial Regulations, Capital Controls and Risk Management | 62 | ||
| H. Conclusions | 66 | ||
| Notes | 67 | ||
| References | 70 | ||
| Chapter III FROM LIBERALIZATION TO INVESTMENT AND JOBS: LOST IN TRANSLATION | 73 | ||
| A. Global Economic Integration and the Labor Market | 73 | ||
| B. Capital Formation, Growth and Employment | 76 | ||
| 1. Issues at stake | 76 | ||
| 2. The record | 77 | ||
| 3. Public investment | 82 | ||
| 4. FDI and capital formation | 84 | ||
| 5. Policy failure: Omission or commission? | 87 | ||
| C. Managing Profits and Accumulation | 88 | ||
| D. Macroeconomic Policy: What Policy? | 92 | ||
| 1. Imbalances in the industrial world | 92 | ||
| 2. Fiscal constraints and procyclical policy in emerging markets | 95 | ||
| E. Financial Instability, Investment and Employment | 97 | ||
| 1. Financial boom–bust cycles | 97 | ||
| 2. Financial and investment cycles | 100 | ||
| 3. Bubbles, crises and jobless recoveries | 102 | ||
| F. Policy Priorities | 104 | ||
| Notes | 108 | ||
| References | 111 | ||
| Chapter IV EXCHANGE RATE MANAGEMENT, GROWTH AND STABILITY: NATIONAL AND REGIONAL POLICY OPTIONS IN ASIA | 117 | ||
| A. Introduction | 117 | ||
| B. Exchange Rate, Trade and Growth | 119 | ||
| 1. The export–investment nexus | 119 | ||
| 2. Exchange rate, employment and investment | 122 | ||
| 3. Limits and costs of reliance on the exchange rate | 123 | ||
| 4. Cross-country evidence | 128 | ||
| C. Capital Flows, Exchange Rates and the Real Economy | 131 | ||
| 1. Boom–bust cycles in capital flows and exchange rate gyrations | 131 | ||
| 2. Wages, employment and investment over the cycle | 133 | ||
| D. Managing Capital Flows and Exchange Rates | 135 | ||
| 1. Policy trade-offs and exchange rate regimes | 135 | ||
| 2. Capital flows, monetary policy and the exchange rate | 139 | ||
| 3. Currency market interventions and reserves | 140 | ||
| i. Interventions and sterilization | 140 | ||
| ii. Reserve accumulation as self-insurance | 141 | ||
| iii. Cost of reserve holding | 142 | ||
| 4. Regulation and control of capital flows | 143 | ||
| E. Recent Experience in Asia | 145 | ||
| 1. The surge in capital inflows | 146 | ||
| 2. Policy response: Currency market interventionsand reserve accumulation | 147 | ||
| 3. Policy response: liberalization of resident outflows | 148 | ||
| 4. Credit, asset and investment bubbles | 150 | ||
| 5. Shocks and contagion from the global financial crisis | 151 | ||
| F. Regional Monetary Cooperation for Stability | 152 | ||
| 1. Global instability and the search for regional solutions | 152 | ||
| 2. Rationale for exchange rate cooperation in East Asia | 155 | ||
| 3. Options for regional currency arrangements | 159 | ||
| 4. Supporting mechanisms: Lessons from Europe | 162 | ||
| i. A regional capital account regime | 162 | ||
| ii. Intraregional lending and policy adjustment | 163 | ||
| G. Conclusions | 165 | ||
| Notes | 167 | ||
| References | 175 | ||
| Chapter V REFORMING THE IMF: BACK TO THE DRAWING BOARD | 183 | ||
| A. Introduction | 183 | ||
| B. The Original Rationale and the Postwar Evolution of the IMF | 184 | ||
| C. Mission Creep into Development Finance and Policy | 189 | ||
| D. Trespassing in Trade Policy | 191 | ||
| E. Crisis Management and Resolution: Bailouts or Workouts? | 194 | ||
| F. Restructuring IMF Lending and Supplementing Resources | 198 | ||
| G. Ineffectiveness and Asymmetry of Fund Surveillance | 202 | ||
| H. Governance: Making the Fund a Genuinely Multilateral Institution | 207 | ||
| I. Summary and Conclusions | 210 | ||
| Notes | 212 | ||
| References | 215 | ||
| Part Two\rTHE GLOBAL ECONOMIC CRISIS\rAND DEVELOPING COUNTRIES | 221 | ||
| Chapter VI THE CURRENT GLOBAL FINANCIAL TURMOIL AND ASIAN DEVELOPING COUNTRIES | 223 | ||
| A. Introduction | 223 | ||
| B. The Role of Finance in the Recent Global Expansion | 224 | ||
| C. Expansion and Crisis in the United States | 225 | ||
| 1. The subprime boom and bust | 225 | ||
| 2. The policy response and prospects | 227 | ||
| D. Capital Flows and Vulnerability in Asia | 231 | ||
| 1. Lessons from the 1997 crisis | 231 | ||
| 2. Capital flows | 231 | ||
| 3. Credit, asset and investment bubbles | 234 | ||
| 4. Current account balances, exchange rates and reserves | 237 | ||
| 5. Capital account measures | 240 | ||
| E. External Shocks and Policy Options in Asia | 241 | ||
| 1. Growth prospects: projections and beyond | 241 | ||
| 2. Financial contagion and shocks | 243 | ||
| 3. Trade linkages and growth in Asia | 244 | ||
| 4. Policy challenges | 245 | ||
| F. Conclusions | 249 | ||
| Notes | 250 | ||
| References | 255 | ||
| Chapter VII THE GLOBAL ECONOMIC CRISIS AND ASIAN DEVELOPING COUNTRIES: IMPACT, POLICY RESPONSE AND MEDIUM-TERM PROSPECTS | 259 | ||
| A. Introduction | 259 | ||
| B. The Great Financial Bubble, Global Expansion and Imbalances | 260 | ||
| C. Asian Vulnerabilities and Spillovers from the Crisis | 264 | ||
| 1. Losses on foreign asset holdings | 265 | ||
| 2. Capital flows and financial and currency instability | 266 | ||
| 3. Remittances | 269 | ||
| 4. Export shocks | 271 | ||
| D. Policy Response and Recovery | 274 | ||
| E. Medium-Term Prospects and Policy Challenges | 278 | ||
| 1. Adjustment and growth in major advanced economies | 278 | ||
| 2. Sustaining rapid growth in Asia | 280 | ||
| 3. South and West Asia | 280 | ||
| 4. China | 281 | ||
| 5. China’s East Asian suppliers | 283 | ||
| F. Conclusions: Policy Issues and Lessons | 285 | ||
| Notes | 287 | ||
| References | 288 | ||
| Chapter VIII THE STAGGERING RISE OF THE SOUTH? | 293 | ||
| A. Introduction and Summary | 293 | ||
| B. The Growth Record | 296 | ||
| C. Global Economic Conditions | 297 | ||
| 1. International trade and investment | 297 | ||
| 2. Capital flows and remittances | 299 | ||
| 3. Commodity prices | 301 | ||
| D. Impact on Macroeconomic Balances in DEEs | 302 | ||
| E. Impact on Growth in DEEs | 306 | ||
| F. The Role of South–South Trade and China | 309 | ||
| G. Crisis and Recovery | 314 | ||
| H. Sustainability and Vulnerabilities | 316 | ||
| I. Conclusions: Reconsidering Policies and Strategies | 321 | ||
| Notes | 323 | ||
| References | 324 |