Tuesday, January 16, 2007

What kind of liberalisation do we need?

Dani Rodrik argues that unfettered capital flows are a bad idea for developing countries:

... Whereas the standard story — the one that motivated the drive to liberalise capital flows — is that developing countries are saving-constrained, the fact that capital is moving outward rather than inward in the most successful developing countries suggests that the constraint lies elsewhere. Most likely, the real constraint lies on the investment side.

The main problem seems to be the paucity of entrepreneurship and low propensity to invest in plant and equipment — what Keynes called “low animal spirits” — especially to raise output of products that can be traded on world markets. Behind this shortcoming lay various institutional and market distortions associated with industrial and other modern-sector activities in low-income environments.


The lesson for countries that have not yet made the leap to financial globalisation is clear: beware. Nothing can kill growth more effectively than an uncompetitive currency, and there is no faster route to currency appreciation than a surge in capital inflows.

Via Mark Thoma: David Wessel asks "Why Economists Are Still Grasping For Cure to Global Poverty":

The U.S. and Europe pulled ahead of the rest of the world in the 19th century, the result of the Industrial Revolution, the evolution of financial markets and the discovery of new drugs and chemicals. With a few remarkable exceptions -- South Korea, for one -- the gap between rich and poor nations persists. ... Says Anne Krueger..: "It was natural that a major objective of...the 'modernizing elite' was to achieve economies and living standards similar to those in the 'developed,' as they were then called, economies." Poor countries had rice patties or coffee plantations; rich ones had factories. The trick, it was believed, was to hasten the industrialization of poor countries, and government had to lead the way.

The prescriptions didn't work out as well as optimistic postwar poverty fighters hoped. ... Why is that? Why aren't more poor countries catching up faster?