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Gregor Irwin, Economic Advisor, HM Treasury,
Christopher L. Gilbert, Professor of Finance in the Department of Finance, Vrije University, Amsterdam; Professor of Econometrics, Università degli Studi di Trento; Fellow, Tinbergen Institute,
David Vines, Professor of Economics, Oxford University; Professor of Economics, Australian National University; Research Fellow, CEPR
This chapter is a substantially revised version of Gilbert, Irwin and Vines (2001) in which the focus is on the implications of capital account liberalisation for the poorest developing countries.
The articles of agreement of the IMF, first drafted in 1945, include among their primary purposes the achievement of current account convertibility and trade liberalisation. In April 1997, the IMF announced its intention to alter its articles of agreement to widen its mandate to include capital account liberalisation. Since then a succession of financial and currency crises worldwide have led some to call into question the desirability of free international capital mobility and to advocate restrictions on capital flows (Rodrik, 1998). In this chapter, we assess how the IMF should view capital controls.
First, we discuss the extent to which countries should move towards capital account liberalisation. The focus is on developing countries as full capital account convertibility already exists in the developed countries. Our argument – in line with the climate of opinion since the crises in East Asia and elsewhere – is one in favour of caution. The reasons are partly sequencing (or ‘second-best’) ones, and partly that liberalisation can increase the vulnerability to financial crisis. Second, we discuss what role the IMF should play in facilitating the policy and institutional development identified in the first part of this chapter as necessary for the successful liberalisation of the capital account.
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