Wednesday, February 27, 2008

Martin Wolf's new book- Fixing Global Finance

I have just completed a book, to be called Fixing Global Finance, which deals with many of these issues. (It is to be published by Johns Hopkins University Press in the US and Yale University Press in the UK and should appear this summer. So now you have my plug!)

I am certainly closer to the Rodrik-Subramanian position now than five years ago. But I remain of the view that free capital flows have some desirable consequences, including a degree of autonomy vis a vis the overweening or predatory state and a stimulus to institutional development.

The big question, however, is: what is to be done? I do not agree with the idea of handing over exchange-rate issues to the World Trade Organisation. That would grossly overload it, so risking its destruction. Nor do I think the IMF can do much about “global imbalances” either. But it would be desirable if the IMF staff were at least allowed to declare openly and clearly that particular countries have grossly undervalued exchange rates or that their intervention policies are indefensible. This would be the power of moral suasion.

Apart from this I have three comments.

First, this is a matter for individual countries to decide. Capital account liberalisation should neither be forced on countries nor should they be prevented by others. Outside advisers, including official advisers, should analyse the pros and cons against the particular circumstance of the country concerned and offer advice on the feasibility of the set of policies proposed.

Second, capital inflows are not a substitute for an adequate level of domestic savings. Promoting the latter is an important policy priority (though not to the excessive levels now seen in China).

Third, countries should normally discourage domestic borrowing in foreign currency, unless they adopt the foreign currency for domestic monetary use. Otherwise, countries should restrict capital inflow to direct investment, portfolio equity and domestic-currency-denominated lending. The fact that the US borrows in dollars makes the consequences of the crisis smaller and the ease of dealing with it far greater.

This last point is a central argument of my book. (Of course, I know others have made the same point, notably Morris Goldstein and Philip Turner.)

Watch a talk of him on the topic

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