The Puzzling Lure of Financial Globalization
Although most of the intellectual consensus behind neoliberalism has collapsed, the idea that emerging markets should throw their borders open to foreign financial flows is still taken for granted in policymaking circles. Until that changes, the developing world will suffer from unnecessary volatility, periodic crises, and lost dynamism.
CAMBRIDGE – After holding off for decades, China has finally embraced financial globalization, announcing recently that it would eliminate capital controls to allow unfettered short-term foreign inflows (so-called hot money). By contrast, after decades of boom-bust cycles, Argentina is facing another a macroeconomic crisis, and has finally imposed capital controls to prevent a catastrophic decline in its currency.
Both of these episodes reveal the intellectual hold that financial globalization still has on policymakers, despite its history of failure. Why, after all, would China abandon capital controls now, and what took Argentina so long to adopt such obviously necessary measures?
The Chinese economic miracle has many sources. In addition to the turn to markets, China has benefited from exports and foreign investment, internal migration, and the Maoist legacy of a public education and health system. It is also the civilizational heir to a strong, effective state with an enlightened, albeit ruthless, leadership. Its people collectively crave stability. But an important factor in China’s rise was the decision not to open the economy to capital flows.