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Draft Background Presentation prepared by Jan Kregel, Levy Economics Institute

Capital Account Liberalisation in China: Learning Lessons Boston, CEGI, February 13, 2014 Panel: Managing Capital Flows in China. Draft Background Presentation prepared by Jan Kregel, Levy Economics Institute. Is “Managing’ the right question?. Three Aspects:

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Draft Background Presentation prepared by Jan Kregel, Levy Economics Institute

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  1. Capital Account Liberalisation in China: Learning LessonsBoston, CEGI, February 13, 2014Panel: Managing Capital Flows in China • Draft Background Presentation • prepared by Jan Kregel, • Levy Economics Institute

  2. Is “Managing’ the right question? • Three Aspects: • 1 The Paradox of Capital account liberalization as a policy recommendation • 2 The “Framing” of the policy recommendation • 3 The Operation of the policy recommendation

  3. The Paradox • Countries with “failed” macro policies: external deficits, fiscal deficits, hyper inflation, exchange rate collapse • Primarily Latin America • Countries with “good” macro policies, external balance, fiscal balance, stable inflation, stable exchange rates • Primarily in Asia • BOTH RECEIVE THE SAME POLICY RECOMMENDATION: LIBERALISE CAPITAL FLOWS!

  4. The Frame • The Solution to the Paradox: • Both sets of countries’ policies are considered to impede the operation of the market mechanism, are inefficient and waste resources • It is presumed that the market can resolve these problems • But there is no definition of what a “capital” market is, or what is traded in these markets • And Policy tends to mistake instruments (opening markets) with objectives • Capital market liberalization becomes an objective in itself, irrespective of whether it furthers other objectives: stable growth of income and jobs

  5. The Application • Policies are recommended in bilateral or multilateral negotiations • Japan-US • Latin America-IMF/WB • Asia-IMF/WB/US • They are usually meant to remedy bi-lateral international imbalances • In fact they remedy problems in the developed countries not in the developing countries that are forced to introduce liberalization

  6. The Outcome • Japan — • Liberalisation under pressure from produced the opposite of the expected results, and then a boom followed by stagnation • Korea — • Liberalisation produced a financial crisis independent of the crisis in SE Asia • Both sacrificed financial stability and growth in the aftermath of crises caused by capital liberalization

  7. What should be “managed”? • Chinese conditions resemble those of Japan and Korea • The law of unintended consequences is likely to apply (or markets will not operate to produce optimal allocation of resources) • Capital outflows and exchange rate volatility likely to result, making internationalisation of the RMB difficult • Unlikely to make firms more efficient

  8. What was wrong with Chinese growth strategy? • Excessive reliance on investment • Excessive reliance on exports • Excessive savings (foreign savings are clearly not needed) • “Management” of capital flows needed to rebalance from I + NX to C + G AND keep growth and employment stable • Will “managing” capital market liberalization allow this?

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