Is capital account liberalisation good for the poor ?

Experts gathered in Oxford in January to discuss the linkages between capital account liberalization (CAL) and poverty reduction at a meeting organized by Bretton Woods Project and Oxfam-GB and sponsored by the UK‘s Department for International Development (DFID).

Focussing on periods of capital inflow, participants from NGOs, academia and the international institutions discussed whether CAL actually was necessary to attract new capital and how it could be directed to pro-poor sectors and industries. In periods of rapid outflow, the participants noted that whilst the poor were hit less hard they were less able to recover from crises. Participants suggested that there may be an asymmetric impact of CAL with the rich benefiting more in good times and the poor suffering more in bad.

Participants concluded that there was a dearth of evidence on the linkages and that a priority should be to undertake country level case studies. Several questions were highlighted for further research:

• What are the mechanisms through which the poor might gain or lose from international financial integration?
• Who gains and loses over the course of financial cycles, and is there evidence that the poor benefit less than proportionately during booms and lose more than proportionately during recessions?
• To the extent that international financial liberalization leads to capital inflows, what are the consequences of these flows for wages and employment, especially in those regions and sectors where the poor live and work?
• What are the consequences for fiscal policy of open international financial markets, especially in terms of how expenditures are financed?
• What if anything do we know about the consequences of financial openness for the poorest countries in the world which now attract almost no private capital flows?
• Does the “policy discipline” imposed by financial openness weaken the government’s ability to have pro-poor fiscal policies?
• What are the implications of the answers of each of these questions for policy?

Rachel Turner, DFID, commented, “Although we seem to be in a bit of a policy and empirical vacuum at the moment, it seems to me that the next couple of years are going to be very important for seeing an improvement in the quality of the analysis of some of these impacts and certainly I think that there are expectations for the Fund and Fund programmes. A lot of us are going to be looking for some of these questions to be opened up.”

In January at the Asia-Europe Meeting (ASEM) in Japan, Horst Köhler, IMF Managing Director commented that, “Given the mixed experience to date, I do see a need for further research and analysis.” However, whilst still arguing that “…the benefits of carefully prepared integration into the global financial system outweigh the risks” he warned that “…we should also draw a lesson from the recent crises in emerging markets that in some cases, there was clearly overly-rapid capital account liberalization.” In the coming months, the IMF staff will be reviewing liberalization experiences in a number of countries in order to begin distilling more detailed, practical suggestions on sequencing. It is not yet known whether these studies will examine poverty impacts.