Private capital flows and poverty reduction: incompatible bedfellows?

Can the flow of private capital be a substitute for aid? Is the commitment of G7 finance ministers to UN development targets at odds with the vigorous manner in which the IMF is promoting capital account liberalistaion (CAL) – the removal of restrictions on the movement of capital across national boundaries? Will CAL block governments from undertaking pro-poor initiatives?

These fundamental questions are examined in a report from the Bretton Woods Project, an NGO initiative to scrutinise and influence the activities of the World Bank and IMF. It presents the findings of a University of Oxford meeting, co-organised with Oxfam, between NGOs, academics and staff from a wide range of international institutions. A background paper evidencing the negative impact of CAL on government spending, social services, access to credit and sustainable livelihoods is accompanied by critiques and comments from liberalisation proponents and globalisation critics.

The report questions the argument that CAL is a determinant of investment flows and a motor for growth and poverty reduction. It strongly argues that in the absence of empirical evidence to support the pro-CAL case, the IMF must accept that CAL reduces poverty and fosters economic growth. The authors produce evidence from a range of states to argue that CAL:

• can destabilise and diminish levels of government finance and hence ability to invest and make provision for the poorest – CAL-induced reductions in health and education budgets are having serious impacts on the poorest
• can increase unemployment as finance is diverted away from rural areas and smaller firms in search of higher investment gains
• exposes economies to volatility and encourages the banking sector to become overexposed.

The key recommendations made by the critics of CAL are:

• Policymakers need to retain a significant degree of control over capital flows.
• Discussions on the reform of the global financial architecture need to include developing country representatives and viewpoints.

Ripostes to the background paper include:

• The Ugandan Central Bank presenting evidence that a long and strategically phased liberalisation process begun in 1992 has measurably contributed to growth and poverty reduction.
• The World Bank arguing that empirical data, though ambiguous, does provide some evidence to prove the hypothesis that CAL promotes growth. Providing support institutions are in place and sequencing is appropriate, CAL can make markets work better if part of a broader package of reforms.
• The IMF asking if there is any evidence that the poor would benefit from maintaining a restrictive capital account regime. The IMF further notes that during the grave capital account crises of 1997-1998, social expenditures were among those least affected by crisis management measures.

While the gathering let do no meeting of minds, there was a broad consensus that while the means of controlling capital flows need to be reconsidered, the objective of controlling them to enhance their productive use is essential.

Source(s):
‘Go with the flows? Capital account liberalisation and poverty’ by Alex Cobham and Angela Wood, Bretton Woods Project, April 2001 Full document.

id21 Research Highlight: 25 June 2001

Further Information:
Angela Wood
Bretton Woods Project
Hamlyn House
Macdonald Road
London N19 5PG
UK

Tel: +44 (0)20 7561 7547
Fax: +44 (0)20 7281 2076
Contact the contributor: info@brettonwoodsproject.org

Bretton Woods Project, UK

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