ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

Capital Account ConvertibilitySubscribe to Capital Account Convertibility

Managing the Transition to Convertibility

There is little doubt that moving towards a more open capital account would benefit the country enormously. The domestic foreign exchange market is providing a leading edge in the move to convertibility. The Tarapore Committee should ensure that residual controls on foreign direct investment and external commercial borrowings are removed and sectoral imbalances in the economy are addressed.

Great Indian Story of Convertibility

Determination of fuller capital account convertibility is not based on the contemporary thinking of economists. It is essentially led by policy-makers' preferences and judgments.

Why Capital Account Convertibility in India Is Premature

At this stage, full capital account liberalisation promises no large benefits while it increases the risk of things going badly wrong. Variations in the flow of short-term capital, like bank loans, give rise to pro-cyclicality of the capital account, which provides the main mechanism by which free capital flows create problems. For the next 10 years at least, many other liberalising reforms need to take priority over capital account liberalisation.

Case against Rushing into Full Capital Account Convertibility

A strong financial sector is required if a nation is to reap the potential gains from trade in assets. In the financial markets, the collapse of a few institutions could lead to a collapse of the entire system. The experience of emerging economies suggests that one should approach the issue of throwing open the capital account with extreme caution.

Capital Movements and Currency Board in Argentina

The early 1990s currency board experiment in Argentina tamed inflation, but it eventually had other disastrous consequences. The pursuit of orthodox policies meant that within a decade the economy was in a shambles. A recounting of the Argentinian tragedy.

Convertibility: Brazilian Experience

The proponents of free capital movement claim that one advantage is the supervision of economic policies by the financial market in the direction of "prudent" policies. The Brazilian case shows precisely the opposite: inflows have not been concerned about fiscal and exchange rate "irresponsibility" and have eagerly responded to arbitrage opportunities, until the "market mood" suddenly changes, resulting in a mix of herd behaviour and a speculative attack on the national currency.

A Practitioner`s Perspective

The majority of practitioners support the measured pace with which the capital account has been opened up in India and would, at best, counsel a moderate acceleration. However, they would argue for a rationalisation of the existing system of controls to remove the â??inefficienciesâ? within the system. The move to convertibility need not be a grand policy gesture, but a steady and focused approach.

Flawed Logic of Capital Account Liberalisation

This article presents a brief summary of theoretical analysis and empirical evidence, suggesting that it is unwise to embark on further capital account liberalisation. India may miraculously avoid the boom-bust cycles associated with open capital accounts, but the costs of failure are very high. And India has very little slack with which to gamble.

Currency Sovereignty and Policy Independence

There are benefits to currency sovereignty, defined as a floating exchange rate currency issued by a sovereign government. When Argentina abandoned its currency board, it gained policy independence: its exchange rate was no longer tied to the dollarâ??s performance.

Poland`s Experience with Convertibility

In Poland, after significant external liberalisation from 1995, the resultant huge capital inflows began to impair economic growth. Appreciation of the domestic currency damaged international competitiveness, leading to high trade deficits, while the inflow of "foreign savings" eventually crowded out domestic savings.

Financial Liberalisation in Semi-Industrialised Economies

Optimistic expectations about capital account liberalisation have not been borne out in reality in Mexico. There have been negative outcomes in a number of areas - overvaluation of the currency, worsening of the current account, decline in domestic savings and many others.
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