Opening the Capital Account of Developing Countries: Some Policy Issues

Daianu, Daniel and Vranceanu, Radu (2003) Opening the Capital Account of Developing Countries: Some Policy Issues. Acta Oeconomica, 53 (3). pp. 245-270. ISSN 0001-6373

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Abstract

In the late eighties, many developing countries followed the example of the most advanced countries and opened their capital account (K.A.) in an attempt to reap new gains from increased integration with the world economy. Currently, after the wave of financial and currency crises that hurt the global economy over the last decade, enthusiasm about K.A. liberalization has greatly faded. First, the relationship between development and capital account liberalization did not come out to be as solid as initially expected; second, the greater capital mobility has brought about new forms of financial instability. This paper points to some risks that might be associated with undifferentiated deregulation of international movements of capital in connection with developing economies. It argues in favor of proper sequencing: liberalization should proceed in parallel with progress when it comes to macroeconomic stability, building market competition and the creation of a sound, internal financial system. A separate section analyzes this issue in the special context of transition economies.

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