Bretton Woods Project
London N19 5PG
2 August 2001
Thank you for your letter of 18 June about capital account liberalisation in developing countries and for sending me your report on capital account liberalisation and poverty.
Our reading of the evidence is that, managed correctly, capital account liberalisation offers the prospect of considerable benefits to emerging market economies. But it is also a complex process. Proper sequencing of capital account liberalisation with reform is therefore essential to maximise the developmental advantages and minimise the risk associated with greater openness. For these reasons there is, I think, a broad consensus on the need to manage liberalisation as part of an integrated strategy; comprising not only the supporting macroeconomic, financial and structural reforms but also complementary social sector reforms needed to ensure that liberalisation does not create new areas of venerability. We are not in a world which liberalisation does not create new areas off venerability. We are not in a world in which liberalisation is advocated by the institutions as and end in itself, irrespective of underlying conditions. But nor can we deny the benefits of openness and the access to private capital on which economic development depends.
You will I am sure have seen the recent report of G7 finance ministers which addresses these very issues. The report stresses that the goal of the international community, and of the IMF and World Bank in particular, should be help to those countries who wish to liberalise their capital accounts to adopt the necessary policies which ensure that liberalisation is of benefit to their citizens. Since capital account liberalisation needs to be undertaken as part of a broader process of reform which cuts across the remits of the Bretton Woods Institutions, the G7 have encouraged the World Bank and IMF to work together to provide support and expertise to countries seeking access to international capital markets.
There cannot, of course, be any standardised, one size fits all approach to liberalising the capital account – hence the emphasis in the white paper on a country specific approach, which I think is now broadly supported. Any strategy for sequencing capital account liberalisation needs to take into account differences in countries’ capacity to manage the risks associated with greater openness. We believe that the joint IMF – World Bank Financial Sector Assessment Programme, established in 1999, provides a useful platform for identifying potential areas of venerability, and prioritising, organising and coordinating technical assistance needed to address them. The Fund’s involvement in the FSAP process has focused especially on the linkages between the soundness and operations for the financial sector and macroeconomic performance and the support of policies that lessen the likelihood and severity of financial crises. The Bank’s focus has been on strengthening the financial sector to promote economic development and reduce poverty. We will look to this multilateral mechanism as the best way for taking forward the “road maps” principle in a coordinated way, with bilateral donors standing read to add their support. As you may know, the UK has also announced plans to establish a multi – million fund to do just that – linked to achievement of internationally recognised financial codes and standards. We hope that the UK‘s commitment in this area will help to lever in funds from other donors.
Finally, I should point out that decisions are continuing on the broader questions of sequencing of reform and orderly liberalisation – learning lessons from past experience and drawing out some broad conclusions which might inform work at a country level. We understand the Fund will publish a paper on the issue in the near future.