• Financial liberalisation

Financial liberalisation

The author argues that developing countries that have undergone rapid liberalisation have on average experienced disappointing capital accumulation and growth.

The author concludes that:

• while macroeconomic stability may be necessary to sustain rapid accumulation and growth, it is not sufficient
• price stability on its own cannot secure stability in macroeconomic aggregates and relative prices, since it is not sufficient to secure financial stability
• the main challenge for policy makers is unemployment and financial instability rather than inflation.

National level policy priorities in developing countries should include:

• a fiscal policy combining stability with high level economic activity
• a redeployment of policy instruments to reduce financial instability and prevent boom-bust cycles in capital flows
• action at sectoral levels in industrialising countries, to directly influence the volume and composition of investment. This may require restoration of fiscal autonomy, eliminating structural deficits either through a reform of taxation and primary spending or by addressing the stock of public debt
• a once-and-for-all capital levy on holders of government debt in countries facing unsustainable debt stocks
• counter-cyclical fiscal policies targeting spending on public works which are easier to control than current spending
• value-added taxes used e.g. to check consumption and credit booms while providing additional revenues
• application of the Golden Rule of public finance to prevent the burden of adjustment from falling disproportionately on public investments
• taxes and financial instruments that favour their allocation of profits and credits to productive investment rather than luxury consumption or unproductive wealth accumulation
• sectoral level policies lessening the uncertainties associated with investment decisions.

The author further argues that national level policies must be complemented by international policies, formulated e.g. by the IMF. The author argues that the Fund should:

• develop techniques/mechanisms designed to separate capital account from current account transactions, to distinguish among different types of capital flows according to sustainability and economic impact, and to provide policy advice and technical assistance to countries at times when such measures are needed
• stop promoting procyclical policies in countries facing payments difficulties as a result of trade and financial shocks
• develop debt workout mechanisms for crisis management and resolution, and provide international liquidity to support imports and economic activity, rather than to bailout creditors.

Finally, any reform seeking greater international economic and financial stability needs to address the policies and operational modalities of the Fund as well as the shortcomings in its governance structure.

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