Go with the flows?

18 June 2001

A meeting, organised by Bretton Woods Project and Heinrich Böll Foundation during the World Bank/IMF Spring Meetings, discussed the linkages between financial liberalisation and poverty reduction detailed in a new report, Go With the Flows? Capital Account Liberalisation and Poverty.

Civil society, academic, World Bank and IMF experts agreed that more attention should be given to who gets access to private sector finance.

Jane D’Arista, Financial Markets Center, argued that capital account liberalisation (CAL) largely benefited the US, which gets cheap credit from countries holding dollar reserves. Moreover, most private finance was consumed by financial institutions in rich countries to fund their own activities such as investing in derivatives. She argued for credit allocation mechanisms in developing countries similar to those used in the US.

Isabelle Grunberg, a consultant for the UNDP, argued that CAL has reduced government revenue (even if some of this was unsustainable), which have not been substituted. For John Williamson, Institute for International Economics, a significant negative impact was the inability of governments to tax capital, which pushed the taxation burden on to the poor. He suggested finding ways to enable countries to tax capital abroad or through capital controls such as those imposed by Chile. Nancy Birdsall, Carnegie Endowment for International Peace, added that in the short run CAL is also a source of wage inequality, which impacts negatively on unskilled workers.

Amar Bhattacharya, World Bank, was sympathetic to the report’s analysis and proposed that more emphasis should be put on appropriate safeguards to ensure countries benefit from CAL while mitigating the risks. The policy response must be appropriate and heterodox, he said: “countries must get into the pool with the appropriate life jacket”.

Meanwhile the Bank published a report in May which argues for privatisation of banks, more foreign involvement in financial sectors and appropriate regulation and incentives as an effective formula for financial sector development. In a letter to the Financial Times (29/5/01), the Bretton Woods Project argued that evidence shows that increased foreign ownership and deregulation of the banking sector would not necessarily achieve a healthy financial sector, or reduce the cost of credit or increase the access of poorer people. Governments have a vital role to play in ensuring that small businesses do not become excluded from credit. The Bank should be working with governments to find more effective, market-friendly ways for governments to do so and to promote investment opportunities in key poverty-reducing sectors.

Go with the flows?

Finance for Growth, Policy Choices in a Volatile World