Diminished Expectations

David Wessel of the Wall Street Journal says expectations of benefits from allowing financial capital to flow freely between countries are fading:

Advocates of Borderless Money Temper Outlook for Benefits, by David Wessel, WSJ: Ten years ago, with spectacularly bad timing, finance ministers and central bankers gathered in Hong Kong and declared that encouraging the free flow of capital across borders should become as much a part of the International Monetary Fund's mission as encouraging trade in goods and services.

That was in September 1997, in what turned out to be the opening act of the Asian financial crisis ... heightening fears that allowing money to slosh around the globe without restriction could be dangerous to economic health. In the end, the IMF's mission wasn't expanded.

A lot has happened in the past 10 years. Private money shied away from emerging markets for about five years but returned ... in 2004... Emerging markets, China in particular, have built huge war chests of foreign reserves in case they have to fight another 1997-style war against currency speculators. Talk of imposing controls on flows of short-term money in and out of emerging markets has faded.

But anxiety about unfettered flows of money could return if recent market turmoil persists, economies falter and politicians react to public suspicion ... that globalization means huge profits for Wall Street, hedge funds and private-equity investors and uncertain benefits for workers.

Amid all this, intellectual architects of the world financial order are rethinking the case for allowing money to move wherever it wants. ... The theory was that capital would flow from rich to poor countries because returns would be higher there, and that would spur growth in the poor countries. ...

But money is actually flowing heavily from poor nations (China) to rich countries (the U.S.), the reverse of what economists think should happen. And some countries that grew fastest between 1980 and 2005 (ranging from China to tiny Mauritius) weren't completely open to financial globalization. Some of the countries that were relatively open (Bolivia and pre-Chávez Venezuela) didn't grow at all.

The rationale for free flows of capital is undermined and the advantages are less than evident. So are the benefits worth the risks of ... financial crises? Stanley Fischer says they are. Mr. Fischer is ... convinced ... that "orderly" opening of an economy's financial markets to the rest of the world is wise -- but for different reasons.

It isn't clear, he says, that there are "massive, obvious benefits" from the money that flows into an economy when barriers to entry and exit are lowered. Instead, the benefits "have much more to do with your world view, how your people look at the world, and what they need to do to prosper." ...

In short, exposure to global capital markets ... forces financial markets and firms to be more efficient, offers businesses and consumers better terms for borrowing and lending, reduces openings for corruption and discourages short-sighted domestic economic policies. It isn't the money; it's the collateral benefits...

The case for erasing national borders to lift the fortunes of people in countries rich and poor isn't intuitive. That's why it has been so controversial for so long. There are obvious benefits: The world is richer today and has fewer poor people than it did 25 years ago. But there are obvious risks.

And in an admission that is striking coming from researchers at an institution that was ready to carve a new commandment into its charter a decade ago, Mr. Rogoff and his IMF colleagues conclude: "The more extreme polemic claims made about the effects of financial globalization on developing counties, both pro and con, are far less easy to substantiate than either side generally admits."