The Importance Of Capital Liberalization

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Rather than liberalizing international capital movements, the world should strengthen capital controls in order to ensure global financial stability Economic growth of a country is the process in which technological revolution, industry, infrastructure and institutional activities are experiencing continues improvement. Technological progress, industry and infrastructure depend on investment, and investment itself needs capital. Looking to the history, developed countries have more capital but relatively lower return on investment compared to developing countries. Therefore, capital flow that is, "removing barriers on flowing capital to flow capital freely in or outside of a country," from developed countries to developing countries can help…show more content…
Because on that time under the Bretton Woods system, dollar was set to gold and other countries were using dollar as a reserve currency. In this case, letting capital account liberalization causing deflation, growth rate decreases and unemployment increases. Therefore, most countries were implementing capital controls and did not want to flow their capital out which made capital liberalization impossible. United states was the very first country took advantage of capital account liberalization. as after the collapse of Bretton Woods system, dollar was no longer set to gold and Federal Reserve started inflation targeting policy, meaning Federal Reserve of US could issue more money to prevent deflation. Hereafter US turned from a supporter of capital controls as a promoter of capital…show more content…
However, because of the periodic volatilities of the economy, revenues from export related sectors will decrease during the downturn of the economy, and even will go into default in repaying back its debts in foreign currency. Same thing happened in South Korea during East Asian financial crisis. Will firms and financial institutions invest at home that they comparative advantage? Difficult for governments to guarantee it. Short term capital movements, as it appears from its name, have short periods and because of this short periods mostly using in highly liquid and stock markets which is not considered as investments in real economy. Inflows into highly liquid and stock markets are highly possible to lead these markets into stock and housing bubble, causing currency appreciation, exports are losing competitiveness in foreign markets and economy starts downturn. Investors will decrease investments in stock markets in a result capital will flow out, bubble will collapse and the final result will be crisis. In short cons of this kind of short term inflows outweigh pros for the developing

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