Capital Account Convertibility Research Articles

Trade in Financial Services, Capital Flows, and the Value‐at‐Risk of Countries

In light of the recent financial crises in the emerging markets, the coming-into-force of the financial services agreement under the GATS has been considered a success. While the agreement provides for little new liberalization but rather formalizes the status quo, it was feared that governments could even backtrack on previous commitments in the belief that more open markets could increase the degree of susceptibility by undermining financial stability. Strengthening the financial system’s ability to evaluate and manage risk has therefore been identified as a precondition for more ambitious liberalization efforts in the future (Dobson and Jacquet, 1998). Encouragingly, in some countries banks have begun to implement Value-at-Risk approaches as a tool to assess their balance sheet vulnerability. As this paper argues, such an approach could also play a useful role in determining the extent of market risk on the macroeconomic level, with potentially important implications regarding trade in financial services, capital account convertibility, and international crisis management.

Financial Fragility and Economic Performance in Developing Economies: Do Capital Controls, Prudential Regulation and Supervision Matter?

Little empirical investigation exists of the links among capital account liberalization, prudential regulation and supervision, financial crises, and economic development, mainly because of the lack of comparable measures to describe regulatory practices for different countries. This paper examines empirically, albeit in a preliminary manner, these links using new measures of capital controls, prudential regulation, supervision, and depositors` safety for a sample of 15 developing economies over the period 1990-97. Results confirm the importance of the degree of capital account convertibility and the regulatory and supervisory framework in affecting financial fragility and economic performance.

Financial Fragility and Economic Performance in Developing Economies: Do Capital Controls, Prudential Regulation and Supervision Matter?

Little empirical investigation exists of the links among capital account liberalization, prudential regulation and supervision, financial crises, and economic development, mainly because of the lack of comparable measures to describe regulatory practices for different countries. This paper examines empirically, albeit in a preliminary manner, these links using new measures of capital controls, prudential regulation, supervision, and depositors’ safety for a sample of 15 developing economies over the period 1990–97. Results confirm the importance of the degree of capital account convertibility and the regulatory and supervisory framework in affecting financial fragility and economic performance.

The Asian Financial Crisis: Singapore’s Experience and Response

Although Singapore has a very open economy, both in the current and capital accounts, the impact of the crisis has not been as severe as in several less open regional economies; thus economic openness and globalization are not sufficient factors. Further, despite sound fundamental macroeconomic policies, Singapore did not escape the fallout from the regional crisis; thus these factors are insufficient insurance against overreactions and herd behaviour of currency traders and speculators. Finally, Singapore's policy response to the crisis is not to reject globalization and liberalization, but to undertake further reforms and restructuring to ensure international competitiveness. Introduction More than a year after the currency and financial crisis exploded in Southeast Asia, starting with floating of the Thai baht in July 1997, much has been written and debated regarding the causes and effects of the crisis and the necessary and appropriate responses at national and international levels. Singapore's experience with, and response to, the regional crisis makes for an interesting case study. First, Singapore has a very open economy, both in the current and capital accounts, yet the impact of the crisis has not been as severe as in several less open regional economies because it has strong macroeconomic fundamentals, sound macroeconomic policies, a healthy domestic financial system, and political and social stability. Second, Singapore's policy response to the crisis is not to reject globalization and liberalization and impose capital controls but to strengthen the domestic financial system and improve the economy's international competitiveness. Sound Macroeconomic Fundamentals and Policies Economic Openness and Vulnerability By any set of criteria, Singapore is one of the most open economies in the world which, together with its small size, renders it highly vulnerable to external developments beyond its control. The economy is continually subject to the discipline of the market and hence has to maintain strong macroeconomic and financial fundamentals and political and social stability to remain attractive to international capital, and pursue sound macroeconomic and financial policies. Table 1 presents some indicators of economic openness. Total trade in goods and services reached US$327 billion or 331% of GDP in 1997, with external demand accounting for two-thirds of total demand. Foreign investment penetration is extensive - the stock of inward foreign equity investment (direct and portfolio) reached US$70 billion in 1995 or 81% of GNP, while foreign controlled companies (with foreign equity ownership of over 50%) comprised 18% of the total number of companies and nearly 60% of total corporate assets in Singapore. Outward equity investments are of a lesser order, but still reached US$34.2 billion by 1995 or 33% of GNP. Foreign participation in the Singapore financial sector is probably one of the highest in the world. As a financial centre, Singapore plays host to 142 foreign banks as well as a large number of other financial institutions, while the total assets of the Asian Dollar Market (ADM) reached US$375 billion by end-1997. Ranked as the world's eighth largest offshore lending centre, the ADM plays a crucial role in mobilizing global funds for onlending to the region. With full employment since the 1970s, the foreign workforce has also been on the rise, accounting for 2>25% of the total workforce in recent years.' Sound Economic Fundamentals That Singapore has been less affected by the regional crisis is in large part due to its strong macroeconomic and financial fundamentals. With financial liberalization and capital account convertibility, these have helped maintain investor confidence and fend off speculative attacks. Real GDP growth has been high and sustained, averaging 9% in the period 199-97; as a result, per capita GNP reached US$26,475 in 1997, higher than several OECD countries. …

Capital Account Convertibility and the Financial Sector

As if it were still necessary, events unfolding in Asia for over a year reconfirm the critical importance of a sound, efficient financial sector for economic development and growth. Indeed, a growing number of studies underscore the risks that a vulnerable financial sector pose for macroeconomic stability. In this context, it is often argued that the liberalization of capital account heightens financial sector vulnerability. But openness to capital flows can also underpin and deepen the development of the financial sector, thus contributing to its robustness. The paper examines these issues, drawing a parallel between capital account liberalization and domestic financial deregulation, indicating the role of the macroeconomic policy environment and reviewing their implications for the pace and sequence of the external liberalization process. The examination concludes with a brief discussion of the role and procedures the IMF envisages to take toward capital account liberalization.

Strengthening the International Financial Architecture

After reviewing the post-World War II evolution of the international financial architecture, this paper presents a critical appraisal of current proposals for reform: limiting capital account convertibility, introducing an international lender of last resort, and reforming debt market institutions and instruments. These proposals do not quite examine whether the potential of triggering a contagious crisis is confined to a few countries. Instead of looking for an institutional framework that in an abstract and universal sense minimizes the probability of a crisis, a more modest approach focusing on countries that could potentially trigger a crisis could have a much higher payoff.

Capital Account Convertibility: A New Model for Developing Countries

This paper analyzes issues for developing countries considering a move to capital account convertibility. It reviews the relevant literature, including arguments for sequencing, and analyses in a series of charts various features of the foreign exchange market impact of removing controls, as against the alternative of foreign exchange intervention. Finally, it examines recent experiences of capital account liberalization by developing countries in the context of multi-pronged stabilization programs.

Capital Account Convertibility: A New Model for Developing Countries

This paper analyzes issues for developing countries considering a move to capital account convertibility. It reviews the relevant literature, including arguments for sequencing, and analyses in a series of charts various features of the foreign exchange market impact of removing controls, as against the alternative of foreign exchange intervention. Finally, it examines recent experiences of capital account liberalization by developing countries in the context of multi-pronged stabilization programs.

Liberalization of the Capital Account: Experiences and Issues

This paper reviews the experience with capital controls in industrial and developing countries, considers the policy issues raised when the effectiveness of capital controls diminishes, examines the medium-term benefits and costs of an open capital account, and analyzes the policy measures that could help sustain capital account convertibility. As the effectiveness of capital controls eroded more rapidly in the 1980s than in earlier periods, new constraints were placed on the formulation of stabilization and structural reform programs. However, experience suggests that certain macroeconomic, financial, and risk management policies would allow countries to attain the benefits of capital account convertibility and reduce the financial risks created by an open capital account.

Liberalization of the Capital Account: Experiences and Issues

This paper reviews the experience with capital controls in industrial and developing countries, considers the policy issues raised when the effectiveness of capital controls diminishes, examines the medium-term benefits and costs of an open capital account, and analyzes the policy measures that could help sustain capital account convertibility. As the effectiveness of capital controls eroded more rapidly in the 1980s than in earlier periods, new constraints were placed on the formulation of stabilization and structural reform programs. However, experience suggests that certain macroeconomic, financial, and risk management policies would allow countries to attain the benefits of capital account convertibility and reduce the financial risks created by an open capital account.