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We must curb international flows of capital

First large downhill flows of capital - from rich countries to poor countries - led to the Latin American debt crisis of the early 1980s. In the 1990s similar flows begat the Asian financial crisis.

Since 2002 the flows have been uphill, from emerging markets and oil-exporting countries to the developed world, especially the US. But the outcome has not been very different. So, it does not seem to matter how capital flows. That it flows in sufficiently large quantities across borders - the celebrated phenomenon of financial globalisation - seems to spell trouble.

(...)

Some would claim that the problem in all these instances was not liquidity but lax regulation, which turned what should have been prudent borrowing into a destructive binge. But this argument is too optimistic about the potential of prudential regulation to stem excessive risk-taking. In the US the entire policy apparatus avoided any regulatory action against lax lending. Even when the will is there, prudential regulation is bound to remain one step behind financial innovation.

If the risk-taking behaviour of financial intermediaries cannot be regulated perfectly, we need to find ways of reducing the volume of transactions. Otherwise we commit the same fallacy as gun control opponents who argue that "guns do not kill people, people do". As we are unable to regulate fully the behaviour of gun owners, we have no choice but to restrict the circulation of guns more directly.

What this means is that financial capital should be flowing across borders in smaller quantities, so that finance is "primarily national", as John Maynard Keynes advised. If downhill and uphill flows are both problematic, capital flows should be more level.

(...)

Financial globalisation has not generated increased investment or higher growth in emerging markets. Countries that have grown most rapidly have been those that rely least on capital inflows. Nor has financial globalisation led to better smoothing of consumption or reduced volatility. If you want to make an evidence-based case for financial globalisation today, you are forced to resort to indirect and speculative arguments.

They call for taxes on oil, an appreciation of Asian currencies, and stricted capital controls. And this is Dani Rodrik and Arvind Subramanian, is senior names in the economics field...

We no longer need ATTAC - se have the FT!

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Feb 26th, 2008 at 07:08:54 PM EST
of the current situation to even publish such a view. Your Anglo Disease rubric really does capture the context.

Not directly related, but here is another "Wow!" - one of the stupidest pronouncements yet from the Bushits:
"Fed Vice Chairman Donald Kohn, in a speech Tuesday, said the Fed remained concerned about the weak economy, signaling the possibility of further rate cuts. While noting recent "disappointing" news on inflation, he said, "I do not expect the recent elevated inflation rates to persist," in part because the slowing economy should ease pressure on wages."

paul spencer

by paul spencer (spencerinthegorge AT yahoo DOT com) on Tue Feb 26th, 2008 at 07:51:55 PM EST
[ Parent ]
Very interesting paper! However, to be fair, Dani Rodrik has been criticising the dominant model/narrative for a long while.

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Tue Feb 26th, 2008 at 07:58:05 PM EST
[ Parent ]
If those are ´senior names in economics´, the juniors must be ant brains.  

These two do not deal with ´reality´, they just make it up as they go along and then they confuse their sick-value system with topography, while catching a glimpse of the gun problem somewhere, to come to an unsupported conclusion.  Truly seni..le minds.

Give ´em more rope.

P.S.  Maybe you should be charging the fool times for translating into real life.


Our knowledge has surpassed our wisdom. -Charu Saxena.

by metavision on Thu Feb 28th, 2008 at 04:11:20 PM EST
[ Parent ]

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