Thursday, August 21, 2008

Liberalising Da Kapital Markit

Tim Worstall, often likes to talk about us lefties just don't get da markit, but for all this arrogance this post about liberalising capital market flows is somewhat lacking, he quotes a paper mentioned on Cafe Hayek about how liberalisation of capital markets brings foreign investment and encourages economic growth. Curious, because it's the complete opposite of what I've read about it.

Foreign investment in markets tends to follow a herd behavior moving in when prospects are good and creating a bubble then moving out with equal alacrity in a downturn exacerbating worsening the downturn. For a developing nation that could do with a steady flow of capital this kind of behavoir is deeply harmful. This was demonstrated very clearly in 1997 in the Asian crises. The stock markets of developing nations are especially vunerable to this because of their small size relative to those in the developed world, the largest, in India is 1/30th of the size of the US stockmarket.

The main effect of capital market liberalisation is to cause volatile money flows in and out of a country to no real good effect. There are policies to encourage growth in developing nations, and they do involve opening up the economy to the rest of the world, but this one should be way down the list of priorities.


Tim Worstall said...

"to no real good effect."

Erm, real wages rise? Just what we would expect from adding more capital to labour, you know, rising productivity? This is "no good effect"?

Isn't this what we actually are aiming for?

That flood of capital into China over the past couple of decades has led to manufacturing wages there rising by 14%, year on year. They're four times higher than they were only 12 years ago.

This is "no good effect"?

Andreas Paterson said...

Tim, I've been away for the weekend, so please excuse the delay.

I would agree that a real wages rise is a good thing, what I'm not so sure about is whether this can be entirely be attributed to liberalising capital markets.

I'm no expert on the matter, but I believe that China's markets are still pretty restricted although less so than in the past. Foreign investment has been allowed but in a tightly controlled.

China's growth is undoubtedly a good thing, but I think it's success is due to a very carefully chosen set of policies with a gradual opening up of the economy. I'm not sure that "Liberalise your markets and wealth will be yours" is a conclusion that can be drawn from the example of China.