The IMF Joins the Econoblogosphere

Simon Johnson, who heads up the research department at the IMF, is now blogging,

and in his official capacity, no less. My favorite part of the blog so far is

the "about"

page, which says that "the aim of the blog is to interact more with people

who don’t attend press conferences"; you can’t argue with that!

Johnson’s meatiest

blog entry so far is on the thorny issue of capital flows.

A recent

study by the IMF’s research department-which used data from the past 30

years to assess the effects of financial globalization-conveys two messages.

The first is that countries should be cautious about external financial liberalization

when financial sector development and institutional quality are below key

thresholds. In other words, don’t go in the water unless you can swim.

The second is that caution has costs: financial openness may itself catalyze

improvements in fundamentals that enhance the benefits of globalization. Capital

controls, whatever their benefits in terms of mitigating the risks associated

with volatile capital flows, are costly in a variety of ways. In other words,

everyone really should learn to swim…

Of more pressing immediate concern is the fact that capital is currently flowing

to many countries whether or not they are ready to receive it…

If I’m right, then the major risk today is not imminent crisis but rather

that the capital flows arising from the global boom will not be well managed-leading

to the buildup of vulnerabilities. Thus, the danger is that when the party

ends – and it is hard to know when this will be – there will a lot of mopping

up to do.

I like the long-term viewpoint here: everybody’s so excited about the subprime

crisis that the continued healthy capital flows to emerging economies have almost

been forgotten. And I think Johnson is right to be cautious about this idea

that if a country opens itself up to international capital flows, that very

openness will force the country to build institutions strong enough to withstand

the inevitable tides. Asia wasn’t ready for an outflow in 1998, and I don’t

think that countries like Botswana, or even Brazil, are necessarily better-placed


If Johnson is right and too much money is a bad thing for many countries, is

there anything that the IMF or anybody else can do about this problem?

(HT: Hounshell)

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