Sequencing of capital account liberalisation: a challenge to the Washington consensus?

Abstract

Ever since the Basle accords of 1988, progressively harmonised prudential regulation has been required of banks participating in the global economy: and since the early 1990’s, policies towards emerging market economies have been dominated by the“Washington consensus” (Williamson, 1994, pp26–28), which looked to financial (and trade) liberalisation as the way to growth and prosperity. But the need to sequence these steps was not emphasised, and emerging market economies were, in effect, encouraged to liberalise markets as quickly as possible. In April 1997, for example, the Interim Committee of the IMF came out in favour of amending the IMF articles to make the capital account liberalisation1 one of the “purposes” of the Fund (Eichengreen, 1999, p116). It is, however, a lot easier to abolish capital inflow controls than it is to ensure the that the local financial system is in good regulatory order to handle the resulting inflows: so in practice freedom of capital movements will precede effective regulation. But the financial crises in 1990s have demonstrated that the combination of massive inflows with distorted incentives is a recipe for disaster; and, for