Wednesday, January 17, 2007

Dani on liberalization

Read this article on financial liberalization here.

Dani makes an interesting point that what the developing countries really need is the entrepreneurial spirit and low propensity to invest in plant and equipment.  I cite from the main article,
Capital flows appreciate the domestic currency and make production in export activities less profitable, further weakening the incentive to invest. China and India which largely avoided capital inflows from the developed world, managed to keep their currencies strong, thereby keeping profitability and investment strong.
Clearly, there are some advantages to caution and looks like India's caution in encouraging capital flows, although the consequences of which were not probably foreseen, did help boost India's economic interests.  One could also make an argument that the market really knows the best solution to the optimum extent of capital flows and what we have seen in India and China is the result of this market solution. 

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