ࡱ> ac`q` R!bjbjqPqP;:::,8DLN((>>> L L L L L L L$Nh@Q/L/L>>DL>> L L#|C%> HY5k$KZL0L}$,R+p,R$C%C%n ,R.D`hT/L/LdL  Growth and Development of the World: What Have We Learned and What Have We Yet to Learn? Kyungsoo Kim I would like to discuss whether financial opening yields economic growth, especially in emerging market economies. In the aftermath of the recent global financial crisis, this issue is definitely worth discussing. A number of emerging market economies have been severely hit by the crisis, even despite the fact that they had not misbehaved so much prior to it. Rather, their difficulties have seemed at least partly attributable to their having done just what they were advised to do: open their financial markets to global investment. Capital account liberalization in these countries has increased their vulnerabilities to sudden large-scale withdrawals of foreign capital, which is exactly what we have witnessed during the recent crisis. And it should be noted that this problem has occurred even in countries with strong financial regulation and transparent financial systems, such as Korea. Does financial globalization then do good or harm to economic growth in emerging market economies? Unlike trade openness, which most economists support, the consequences of financial openness are quite controversial. Theoretically, financial opening can promote economic growth through direct channels, such as by alleviating capital scarcity in the country concerned, which then lowers its costs of capital. Improvement of risk sharing is another major direct channel through which, in theory at least, financial opening contributes to growth. The majority of empirical studies has failed to find, however, robust evidence of the growth benefits of financial opening through such direct channels, although studies using microeconomic data do appear to provide stronger support than those using macroeconomic data. Now, financial opening might also lead to growth through indirect channels. It might contribute to growth through its so-called collateral benefits, for example by encouraging development of domestic financial sectors, improvements in institutions, better macroeconomic policies, etc. The empirical evidence supporting such indirect effects of financial opening on growth is also not clear, however. In addition to the question of the collateral benefits of financial opening, there is also the equally important question of the collateral damage it may cause in emerging market economies. And the recent financial crisis certainly seems to suggest a connection between financial opening and EME vulnerability to crisis, although, again, the academic literature to date has found no strong empirical evidence of financial opening per se actually leading to economic crises. Even if it is not the actual source of crisis, however, I think it is clear that financial opening may bring about serious problems, especially for emerging market economies. For instance, foreign capital inflows toward emerging market economies tend to be procyclical. In Korea, the annual ratio of our capital account balance to GDP is positively related with economic growth. Capital inflows here have increased during periods of business cycle expansion, while they have decreased during periods of business cycle contraction. Unlike in advanced countries, however, countercyclical macroeonomic policies are unavailable to many emerging market economies. In consequence, in emerging market economies surges in capital inflows followed by sudden stops and reversals tend to accompany the economic boom and bust cycle. This is the so-called capital inflows problem, which has received much attention among international economists. Korea, a relatively sound macroeconomy, has nevertheless witnessed severe foreign capital deleveraging during both the 1997 Asian financial crisis and the recent global financial crisis. It should also be noted that an accumulation of foreign debt often exacerbates the potential risk of maturity mismatches. In Korea, for instance, the growth in banking sector external debt is inversely associated with the ratio of the sectors short-term external assets to its short-term external debt. During a boom the risks of the banking sector as a whole thus increase, as its leverage grows and the extent of its maturity mismatches expands. In view of weak empirical evidence of financial openings growth benefits, together with the potential it has to cause damage, it is too optimistic to believe financial opening will always be very successful. China, in fact, which still exercises strong control over its capital account, has been able to weather the recent crisis relatively successfully, as it did the 1997 Asia financial crisis as well. This suggests that financial opening might need to be gradual and cautious. Our experiences appear to suggest that the benefits of financial opening are most likely to be realized only when certain conditions are met. One such condition may be application of a phased approach to financial opening, with long term capital flows liberalized ahead of short term flows. Macroeconomic stability and a sound exchange rate regime are also important. Moreover, the growth benefits of financial opening are likely to be greater when an effective regulatory framework and a developed domestic financial sector are in place. In the absence of such supporting conditions, premature financial opening can delay the realization of its growth benefits, while making the country vulnerable to sudden stops of capital flows. Development of a local-currency bond market may also be considered, as a means to limit the problem of currency mismatches. Macroprudential regulation that takes capital inflows into serious account may at the same time be a useful means of improving financial stability. Meanwhile, Lord Turner, chairman of the UKs Financial Services Authority, has recently provoked hot debate on the idea of introducing a Tobin tax, on global financial transactions, to throw sand in the wheels of global finance. Ultimately, we should recognize that there is a fundamental tension between the costs and benefits of financial globalization. And we should work hard to make informed efforts in this globalizing world, to find ways of maximizing the benefits of financial openness, while simultaneously minimizing its damage. Thank you.      PAGE \* MERGEFORMAT 3 +0HKZ[hijq  2 = ? 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