A complete opening-up of the capital account carries very significant risks for macroeconomic stability in developing countries. While country experiences are diverse, they suggest that developing countries may be well advised in taking a pragmatic, rather than ideological, approach to capital-account regulation and liberalization in order to avoid counterproductive effects on exchange rates, the current-account balance and the domestic financial system. The IMF should not require all its members to introduce full convertibility to the capital account, but should take an active role in international capital market surveillance and the provision of liquidity where necessary.
During the first half of the 1990s there has been a surge of private capital flows to developing countries, mainly in Asia and Latin America, but also to some countries in sub-Saharan Africa. Such flows are partly attracted by factors unrelated to economic fundamentals and often contribute little to investment and growth. At the same time they can lead to currency appreciations, create serious conflicts with monetary policy objectives, and increase the fragility of the domestic financial system.
A few countries have been quite successful in managing capital flows by opting for gradual and limited financial integration into the global financial markets. Success has depended on flexibility in combining macroeconomic policy tools with direct or indirect controls over capital flows to reduce volatility by deterring interest-rate arbitrage, limiting destabilizing speculation and avoiding bubbles in asset prices and exchange rates.
Despite increased private capital flows a large number of developing countries, particularly the poorer ones, continue to depend on multilateral financing. New forms of conditionality, relating to "governance" and the environment, have created tensions in the borrowing countries and contributed to a stagnation in demand for lending by the World Bank and the International Development Association (IDA). Developing countries are raising questions as to the extent to which such conditionality is consistent with the statutes of the multilateral financial institutions.
These are the findings of a series of research papers prepared for the Intergovernmental Group of Twenty-four (G-24), which the UNCTAD secretariat has just published in the eighth volume of "International Monetary and Financial Issues for the 1990s"(1) (209 pages) on the occasion of the IMF/World Bank meetings to be held in Washington from 28 to 29 April.
Capital account regimes in developing countries are discussed in five of the nine papers included in the volume. Gerry Helleiner (University of Toronto) reviews the evolution of private capital flows to developing countries in the 1990s, the benefits and costs of international financial integration of developing countries and the rationale for capital controls and improvements of international arrangements regarding capital flows. Rudi Dornbusch (Massachussetts Institute of Technology) discusses the advantages of a specific instrument, a cross-border payments tax, for checking speculative capital flows.
The experience of individual countries is discussed in papers prepared by experts from Latin America (Guillermo Le Fort and Carlos Budnevich, of the Central Bank of Chile), sub-Saharan Africa (Louis Kasekende, Bank of Uganda; Damoni Kitabire, Ministry of Finance and Planning, Uganda; and Matthew Martin, External Finance for Africa) and East Asia (Yung Chul Park and Chi-Young Song, of the Korea Institute of Finance, Seoul). Their analyses provide a large amount of relevant data, which, is difficult to obtain from international statistical sources. They reveal important differences in the approach of individual countries to capital account liberalization and the macroeconomic impact of financial reforms undertaken in recent years.
Problems with the new conditionalities of the international financial institutions, for both the borrowing countries and the multilateral financial institutions themselves, are analysed in the papers by Devesh Kapur (Brookings Institution) and Aziz Ali Mohammed (State Bank of Pakistan). The publication also contains a paper on a Multilateral Debt Facility (Matthew Martin, External Finance for Africa), and a critical assessment of the World Bank´s World Development Report 1996 on post-socialist transition, entitled "From Plan to Market" (by Peter Murrell, University of Maryland).
The papers included in the new volume, like those in the seven volumes already published since 1992, were prepared for the G-24 as part of an UNCTAD research project coordinated by Professor Gerry Helleiner. Funding was provided by the International Development Research Centre of Canada, the Governments of Denmark, Sweden and the Netherlands, as well as the G-24 countries themselves. The G-24 was established in 1971 to increase the negotiating strength of the developing countries in discussions in the Bretton Woods institutions on the reform of the international monetary system.