Capital Controls in Emerging Economies

By Christine Ries Hekman; Richard J. Sweeney | Go to book overview

4
The Information Costs of Capital Controls

Richard J. Sweeney


Introduction

The 1980s and 1990s have seen an unprecedented wave of countries liberalizing their economies. Liberalizing countries vary widely in the extent to which their economies are pervasively distorted and cut off from free- market price signals, and the degree to which their economies have basic free-market institutions such as a modern commercial law code, generally accepted accounting standards, a modern banking system, well-functioning capital markets, etc. Though the countries differ greatly, all face the issue of the sequencing of liberalization, or which markets to liberalize first. Many countries liberalize their goods markets first, freeing output markets' prices and opening these markets at least partially (and often increasingly) to international competition; in other words, they first liberalize their trade accounts in the balance of payments, a typical pattern of liberalizing Latin American countries ( McKinnon 1991). Only later do countries make substantial progress in liberalizing their capital accounts.1

The debate about liberalizing capital accounts is mostly at the macro level. Opening capital accounts might increase total investment through increases in inward foreign direct investment.2 In opposition are two conflicting possibilities. Capital flight might arise from mistrust of the government, resulting perhaps in a fall in aggregate investment. Further, supposing government policies are credible and investment opportunities attractive, massive inward foreign direct investment might drive up the country's real exchange rate enough to cause the country's industries serious harm in international competition.3 This aggregate focus obscures the allocative role

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Capital Controls in Emerging Economies
Table of contents

Table of contents

  • Title Page iii
  • Contents vii
  • Preface ix
  • Acknowledgments xi
  • Introduction and Overview 1
  • Notes 12
  • 1 - Orthodoxy is Right: Liberalize The Capital Account Last 13
  • Notes 16
  • 2 - Reality and the Logic Of Capital Flow Liberalization 17
  • Introduction 17
  • Notes 29
  • 3 - Preconditions for Liberalization Of Capital Flows: a Review And Interpretation 33
  • Introduction 33
  • Notes 43
  • 4 - The Information Costs Of Capital Controls 45
  • Introduction 45
  • Conclusions 54
  • References 55
  • 5 - Currency Convertibility, Policy Credibility and Capital Flight In Poland and the Czech and Slovak Federal Republic 63
  • Introduction 63
  • Notes 83
  • References 85
  • 6 - Capital Controls and Corporate Investment Behavior 89
  • Introduction 89
  • Notes 108
  • References 108
  • 7 - Capital Account Liberalization and Policy Incentives: an Endogenous Policy View 111
  • Introduction 111
  • Notes 131
  • 8 - A Payments Mechanism For The Independent States Of The Former Soviet Union 137
  • Introduction: Economic Rationale For a Payments Mechanism 137
  • References 157
  • About the Editors and Contributors 159
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