Why I oppose opening capital account
- By Justin Yifu Lin
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E-mail China.org.cn, August 18, 2013
Since the opening of capital accounts in developed countries, the U.S. economy has entered a time of great moderation. With further financial liberation, property bubbles -- the result of expansionary monetary policies, excessive consumption and a persistent external imbalance -- induced the 2008 global financial crisis.
Reasons for not opening capital account
Even if developing countries do not open the three earlier-mentioned major areas of capital account -- debt flows, FDI flows and portfolio investment flows -- they can still meet their domestic needs for technological innovation, industrial upgrades and infrastructure investment through their own accumulated capital as long as their economic development paths are right. The few best growing economies which have been really advanced from the low-incomes to the high-incomes did not open their capital accounts until reaching the level of high income. In my opinion, only the area of FDI can be opened; the other two should be strictly controlled as their disadvantages outweigh the advantages.
I do understand the embarrassing international position China's central bank has been put in as the U.S. sets the rules and the International Monetary Fund seemingly echoes its policies. If China does not open its capital account, the central bank will have to shoulder the great pressures of a reality in which the U.S. dollar is the anchor currency and the U.S. itself has a huge international capital flow.
As the world's second largest economy now, we can no longer avoid confronting the U.S. head on. Facing the challenge of a large amount of speculative capital flow, it's very hard for the central bank to maintain its monetary sovereignty, in particular because the Renminbi is not free-floating. Of course we cannot blindly copy and follow Western theories as, for example, the new theories raised by U.S. banking academics lack structural conceptions and do not meet the practical needs of developing countries.
The financial structure of developed countries mainly consists of the stock market, venture capital and direct financing, which does not fully comply with that of developing countries. A developed financial structure featuring large amounts of capital flows, will result in excessive economic volatility in developing countries which still have twisted financial structures and lower levels of financial deepening.
Timing is yet another key factor. Developed countries may find themselves stuck in a web of weak economic strength, high unemployment rates and high governmental debts for the next five to ten years. To boost their economies, developed countries will adopt a more lenient monetary policy. Meanwhile, if a big economy like China then opens its capital account, the huge amount of short term capital flows will definitely result in economic volatility and may even trigger yet another crisis.
The question then becomes, "Can the government close the capital account in the event of a budding crisis?" The answer would be no, because the vested interest groups both at home and abroad will oppose to that -- as has happened in Thailand in 1997. It is not easy to curb the flow after opening the capital account.
We cannot study with opening capital account as a premise. That would mean we already accepted the established theory presenting the interests of developed countries, in particular those of Wall Street. As scholars, it is our job to study the problems we have faced thus far and propose our own theories which are in line with China's stage of development. We can then vindicate our interests justly in negotiations with developed countries and international institutions.
The author is Honorary Dean at the National School of Development at Peking University and acts as a consultant to the CF40 Forum. He was the senior vice president and chief economist of the World Bank from 2008-2012.
This post was first published in Chinese and translated by Li Shen.
Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.
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