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Financial globalisation has not generated increased investment or higher growth in emerging markets. Countries that have grown most rapidly have been those that rely least on capital inflows. Nor has financial globalisation led to better smoothing of consumption or reduced volatility. If you want to make an evidence-based case for financial globalisation today, you are forced to resort to indirect and speculative arguments.

It is time for a new model of financial globalisation, one that recognises that more is not necessarily better. As long as the world economy remains politically divided among different sovereign and regulatory authorities, global finance is condemned to suffer deformations far worse than those of domestic finance. Depending on context, the appropriate role of policy will be as often to stem the tide of capital flows as to encourage them. Policymakers who view their challenges exclusively from the latter perspective will get it badly wrong.

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Two concrete actions – one for each source of liquidity – suggest themselves.

First, some variant of petrol tax in the main oil-importing countries (including the US, China and India) is essential to cut demand and reduce oil prices and hence the current account surpluses of oil exporters. That such measures should be taken for environmental reasons or that they would reduce the size of sovereign wealth funds only adds to their attractiveness. Second, some appreciation of east Asian currencies is necessary to reduce their surpluses. Even though undervaluation is a potent instrument for promoting growth in low-income countries in general, at this juncture self-interest on both sides calls for an orderly unwinding of current account imbalances.

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Makes sense to me. And the case for unrestricted capital flows between rich and poor countries is a lot harder to make since the Asian crisis of the 1990s. Indeed, one of the reasons the Asian countries are keeping their currencies so low is to makes sure that they aren't vulnerable to another such episode.

Rodrick and Subramanian are not alone in pointing out that this is also very costly for the Asian countries: China is still a very poor country, and there are better things that they can do with upwards of a trillion USD than let it sit in the vault of their central bank.

eta: Dani Rodrick notes some reactions on his blog.

[ 28 February 2008: Message edited by: Stephen Gordon ]

Foreign direct investment involves a long-term commitment, and it's effects are invariably positive. But a large influx of 'hot money' - the purchase of highly liquid assets that can be sold quickly - could be destabilising, especially if the receiving country's financial markets aren't sufficiently developed to do the job of taking that investment and channeling it into real productive capacity.

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Originally posted by Stephen Gordon:
The problem that the authors are trying to deal with is the sudden outflow of capital from poor countries.

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Since 2002 the flows have been uphill, from emerging markets and oil-exporting countries to the developed world, especially the US. But the outcome has not been very different. So, it does not seem to matter how capital flows. That it flows in sufficiently large quantities across borders – the celebrated phenomenon of financial globalisation – seems to spell trouble.

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[ 29 February 2008: Message edited by: Lard Tunderin' Jeezus ]

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In the first panel, Dr. Rodney Schmidt from Canada presented research that shows that CTT’s are feasible if applied to the settlement of the transaction rather then to the trade itself. Dr. Dean Baker from the USA argued for the need to also regulate the derivatives market to ensure that currency speculators do not devise new instruments to evade the tax.

During the second panel on the tax rate, there was an interesting debate between Dr. Spahn, Germany, who argued for a higher rate of tax only during financial crises and Bruno Jetin, from ATTAC France, who argued for a consistently higher rate to reduce currency speculation and the likelihood of financial crisis from occurring. It was concluded that these different opinions are reflective of whether one sees the role of the tax as primarily to have a dampening effect on currency speculation or to raise maximum amounts of revenue. . .

There was consensus in the fifth panel that the revenue generated must be targeted towards social development, the development and maintenance of global public goods, and fighting poverty and environmental degradation

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The One problem that the authors are trying to deal with is the possibility of sudden outflow of capital from poor countries.

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So, it does not seem to matter how capital flows. That it flows in sufficiently large quantities across borders – the celebrated phenomenon of financial globalisation – seems to spell trouble.

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Originally posted by Stephen Gordon:
But how do we determine what is too heavy?

In the case of foreign ownership in Canada, I'd be concerned if it lead to lower productivity and wages. But that doesn't seem to be the case.

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But Canada's real GDP growth rates since FTA-NAFTA rank somewhere down around Fiji and Benin's, the same two countries our voter participation rates were comparable to in the decade of the 90's.

And all this while foreign ownership in Canada's manufacturing sector is over 50%, the highest level in the developed world.