capital market liberalization and development jun 2008

[...]... and Development 1800 1600 Basis points 1400 Mexican crisis Asian crisis EMBI/EMBI+ 1200 1000 800 600 US high-yield bonds 400 0 Pre-Asian crisis EM spreads Oct-94 Feb-95 Jun- 95 Oct-95 Feb-96 Jun- 96 Oct-96 Feb-97 Jun- 97 Oct-97 Feb-98 Jun- 98 Oct-98 Feb-99 Jun- 99 Oct-99 Feb-00 Jun- 00 Oct-00 Feb-01 Jun- 01 Oct-01 Feb-02 Jun- 02 Oct-02 Feb-03 Jun- 03 Oct-03 Feb-04 Jun- 04 Oct-04 Feb-05 Jun- 05 Oct-05 Feb-06 Jun- 06... increase risk and lower welfare See Stiglitz (1982) and Greenwald and Stiglitz (1986) 12 Capital Market Liberalization and Development capital market liberalization can lead to a worsening of market efficiency, and appropriately designed capital market interventions can increase welfare Developing country financial markets are, for instance, often characterized by maturity mismatches, with long-term investments... greatest burden, and why the advocates of capital market liberalization were so wrong There is another reason for this book’s detailed analysis of capital market liberalization: while a new understanding of the consequences of CML is reshaping many policy discussions among academics and international institutions, ideological and vested interests remain Principles of capital market liberalization have... of market failures—imperfections in markets that are likely to be particularly significant in developing countries Many of the arguments for capital market liberalization are predicated on the assumption that, but for government intervention, markets would efficiently allocate resources These market failures, however, provide a rationale for interventions in capital markets; whereas capital market liberalization. .. financial market and institutional development, better governance, and macroeconomic discipline However, as we point out in this chapter and elsewhere in this volume, the pro-cyclical nature of capital flows and the volatility associated with CML (which are evident in econometric analysis) have often had the opposite effect on both financial market and institutional development Similarly, the market discipline... frequent and larger shocks The issues that the institutional framework must address are also different, due to shallower financial markets and widespread presence of maturity and currency mismatches Therefore, the induced volatility arising from capital market liberalization can easily lead to systemic problems that may persist for years, and which may far outweigh any benefits that capital market liberalization. .. bail-out see Edwards (1999); Jorion (2000); Stiglitz (2002a, 2003) 16 Capital Market Liberalization and Development the scope of government stabilization Capital market liberalization shortcircuits some of the mechanisms that would naturally (and over time) smooth out the impact of disturbances (see Stiglitz 2004) 37 For instance, with capital market regulations in place, higher incomes during a positive productivity... Spiegel, and Joseph E Stiglitz 1.1 Introduction In the 1980s and 1990s, many countries opened their capital accounts and liberalized their domestic financial markets as part of the wave of liberalization that characterized the period In 1997, the IMF even proposed changing its charter to include a mandate to promote capital market liberalization At the time, many other economists warned that open capital. .. increased macroeconomic stability Montiel and Reinhart (1999); Hernandez et al (2001); Carlson and Hernandez (2002); Mody and Murshid (2002) 40 Some economists and practitioners argue that derivatives will further decrease the effectiveness of capital controls 41 For more information, see Stiglitz et al (2006) 20 Capital Market Liberalization and Development First, as we have just shown, there is ample evidence... financial markets that avoids full deregulation—that is, limiting capital market liberalization 1.3.3 Growth Proponents of capital market liberalization maintained that open capital markets would stimulate growth because of improvements in economic efficiency and increased investment, including investment in technology 44 The expansion of aggregate income would then further increase domestic savings and investment, . Ffrench-Davis, and Deepak Nayyar Economic Development & Environmental Sustainability Ramón López and Michael A. Toman Capital Market Liberalization and Development Edited by José Antonio Ocampo and. xi 1. Capital Market Liberalization and Development 1 José Antonio Ocampo, Shari Spiegel, and Joseph E. Stiglitz 2. The Benefits and Risks of Financial Globalization 48 Sergio L. Schmukler 3. Capital. Capital Market Liberalization, Globalization, and the IMF 76 Joseph E. Stiglitz 4. From the Boom in Capital Inflows to Financial Traps 101 Roberto Frenkel 5. Capital Market Liberalization and Poverty