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Road map letter from Bretton Woods Project

10 September 2001

Andrew Lewis
HM Treasury
Parliament Street
London
SW1P 3AG

18 June 2001

Road Maps For Capital Account Liberalisation

Dear Andrew Lewis

I am writing concerning the “road maps” for capital account liberalisation that are proposed in the White Paper, Eliminating World Poverty: Making Globalisation Work for the Poor.

I understand that these are intended to map out on a case-by-case basis the appropriate sequence of steps towards liberalisation. Bretton Woods Project supports analysis and evaluation of financial systems and the measures needed to ensure they are effectively regulated and monitored before liberalisation proceeds. However, we are concerned that the evaluation process should not stop here. In particular, a full assessment of how various steps in the process will impact on vulnerable groups and businesses should be carried out as part of the mapping exercise.

Financial and capital account liberalisation is often advocated as a means for encouraging greater growth, however, the evidence with respect to capital account liberalisation does not bear out this assumption. In addition, as out report Go with the Flows? indicates, impacts on the government’s budget, greater volatility in the economy, and reduced access to credit potentially have serious negative consequences for the poor and small and medium sized enterprises.

The work on sequencing has simply focused on the steps necessary to prevent creating an environment that could lead to a crisis situation. It has failed to take into consideration what sequence of measures is necessary to ensure that the poor and vulnerable and small and medium enterprises are able to benefit most from the liberalisation process. The latter is essential if financial liberalisation is to contribute to poverty-reducing growth.

In the light of these concerns I would be grateful if you would provide the following information regarding the road map process:

1) Who will be responsible for carrying them out?

2) Will they include an evaluation of the social impacts of various liberalisation and deregulation measures?

3) Will they include a full costing of the process, in particular putting in place regulatory and monitoring regimes?

4) Does the UK government intend to provide additional aid resources to finance road maps? Will this be provided on a grant basis?

5) Have countries been selected to pilot this approach and, if so, when will they be carried out?

6) The road maps suggest a presumption towards full capital account liberalisation, although carried out more gradually. However, full liberalisation may not be appropriate from a poverty reduction perspective in the medium- and possibly the long-term. Do you agree that if full liberalisation is likely to prove harmful to poorer sections of society that it should be delayed until a time when an economy is sufficiently advanced to enable the majority of its citizens to benefit?

7) Does the Treasury agree that the IMF should be encouraged to give developing countries advice about what sort of controls are more market friendly and how to implement them efficiently?

8) Does the Treasury agree that the IMF should analyse and advise southern governments about best practice, market-friendly mechanisms for directing credit to sectors and firms which are likely to contribute significantly to poverty reduction goals?

I am happy to enclose a copy of our report, Go with the Flows? Capital Account Liberalisation and Poverty Reduction, which analyses some of the potential linkages between financial liberalisation and poverty. And I look forward to hearing more about the road maps.

Yours,

Angela Wood