Simon Johnson, who heads up the research department at the IMF, is now blogging,
and in his official capacity, no less. My favorite part of the blog so far is
the "about"
page, which says that "the aim of the blog is to interact more with people
who don’t attend press conferences"; you can’t argue with that!
Johnson’s meatiest
blog entry so far is on the thorny issue of capital flows.
A recent
study by the IMF’s research department-which used data from the past 30
years to assess the effects of financial globalization-conveys two messages.
The first is that countries should be cautious about external financial liberalization
when financial sector development and institutional quality are below key
thresholds. In other words, don’t go in the water unless you can swim.
The second is that caution has costs: financial openness may itself catalyze
improvements in fundamentals that enhance the benefits of globalization. Capital
controls, whatever their benefits in terms of mitigating the risks associated
with volatile capital flows, are costly in a variety of ways. In other words,
everyone really should learn to swim…
Of more pressing immediate concern is the fact that capital is currently flowing
to many countries whether or not they are ready to receive it…
If I’m right, then the major risk today is not imminent crisis but rather
that the capital flows arising from the global boom will not be well managed-leading
to the buildup of vulnerabilities. Thus, the danger is that when the party
ends – and it is hard to know when this will be – there will a lot of mopping
up to do.
I like the long-term viewpoint here: everybody’s so excited about the subprime
crisis that the continued healthy capital flows to emerging economies have almost
been forgotten. And I think Johnson is right to be cautious about this idea
that if a country opens itself up to international capital flows, that very
openness will force the country to build institutions strong enough to withstand
the inevitable tides. Asia wasn’t ready for an outflow in 1998, and I don’t
think that countries like Botswana, or even Brazil, are necessarily better-placed
today.
If Johnson is right and too much money is a bad thing for many countries, is
there anything that the IMF or anybody else can do about this problem?
(HT: Hounshell)