ABSTRACT
CAPFLOWS = 2.651nGDPPC** - 0.221nGDP + 3.11OPENCA* - 13.06, (0.49) (0.20) (1.61)
The era of the classical gold standard, circa 1970 to 1914, is rightly regarded as a high-water mark in the free movement of capital, labor and commodities among nations. After World War I, the attempt to rebuild a world economy along pre-1914 lines was swallowed up in the Great Depression and in the new world war the Depression bred. Only in the 1990s has the world economy achieved a degree of economic integration that. . . rivals the coherence already attained a century earlier, (p. 1)
The Japanese government tried to prevent the trading of some of the modern complex financial derivatives that depended upon the value of the Nikkei Index in Toyko. As a result, the trading simply moved to Singapore, where it had exactly the same effects on the Japanese stock market as if it were done in Toyko. This was dramatically brought home to the world when a single trader for Barings securities in Singapore (Nick Leeson) was able to place a $29 billion bet on the Nikkei Index and lose $ 1.4 billion when the index did not trade within the ranges that he expected, (p. 72)
International financial markets allow residents of different countries to pool various risks . . . a country suffering a temporary recession or natural disaster can borrow abroad. Developing countries with little capital can borrow to finance investment, thereby promoting economic growth without sharp increases in savings rates The other main potential positive role of international capital markets is to discipline policymakers who might be tempted to exploit a captive domestic capital market. Unsound policies . . . would spark speculative capital outflows and higher domestic interest rates, (pp. 2-3)
If creditors suddenly become unwilling to roll over short-term loans as they fall due, a country may find itself in a financial squeeze even if, absent a run, it would have no problems servicing its debts. Devotees of the this "multiple equilibrium" view believe that this is precisely what happened in the case of, say, Mexico in 1994 or Korea in 1997. For example, creditor panic at a relatively small devaluation of the peso in December 1994 suddenly made it impossible for Mexico to roll over its short-term debt, quickly precipitating a
crisis. Instead of humming along in a "good" growth equilibrium as Mexico seemed to be doing prior to the crisis, it suddenly bounded into a "bad" recessionary equilibrium, (p. 25)
The difference between the analytic understanding of capital-and currentaccount liberalization is striking. The economics profession knows a great deal about current account liberalization, its desirability, and effective ways of liberalizing. It knows far less about capital account liberalization. It is time to bring order both to thinking and policy on the capital account, (p. 8)
It follows that jobs, prices, production, growth, the standard of living and the economic security of everyone all rest in their hands. . . . A major function of government, therefore, is to see to it that businessmen perform their tasks . . . governments cannot command business to perform. . . . They must therefore offer benefits to businessmen in order to stimulate the required performance, (pp. 172-173)
28. Kurzer (1993) was among the first political scientists to see this connection.
