Critics of financial globalisation argue that these problems are so great that emerging markets ought to be insulating themselves through capital controls. Many have been doing so. Yet even setting aside doubts about how far this is desirable (it is hard to believe growth in India or Brazil would have reached today’s levels without foreign capital), the studies raise questions about whether capital controls are really the right response.
The second study points out that “sudden stops” of capital inflows tend to be an inverted U-shape: the poorest countries are the least vulnerable to global financial shocks; middle-income countries are the most; but, as you get richer and more integrated into global finance, your vulnerability tends to fall again-and that remains true despite the crisis in America. So it might still make sense for countries like India and Brazil to carry on liberalising. Moreover, as the Reinharts show, a big part of the problem is that capital flows are endemically boom-bust: money floods in and out. They argue that fiscal policy should be used to smooth out such cycles: governments should reduce deficits or run surpluses during bonanzas-the opposite of what they usually do. This implies something of a paradox. Capital flows are supposed to be a reward for good economic behaviour. But as Dani Rodrik, a Harvard professor, says, “these policy conclusions turn capital inflows into an imperative for even deeper reform.”
Questions of equity
Sep 25th 2008
From The Economist print edition
Salary caps are a rotten idea; but the crisis also carries lessons for regulators and workers
IT IS easy to understand why many in Congress and beyond have demanded salary caps on bank executives as a condition of approving the Bush administration’s bail-out of the financial system. After all, many of the people who will be leading the effort to get the banks back on their feet were the very same masters of the universe whose greed and myopia brought the industry to its knees in the first place. Nonetheless the lawmakers’ apparent decision to impose some form of still unspecified wage limit, a demand reluctantly accepted by Hank Paulson and the Bush administration this week, is a mistake.