1 - The Liberalisation of Capital Flows

Summary

Cross-border capital flows have long played an important role in the world economy. Yet foreign capital brings both benefits and risks to host countries. On the one hand, the expansion of global trade and the related increase in financial transactions have permitted market expansions and created wealth in both industrialized and emerging economies. On the other hand, cross-border capital flows can worsen economic conditions and deepen monetary instability. As a result, while capital account liberalisation and the free flow of capital were once almost universally praised as the solution to foster global economic growth, they have now come under serious scrutiny. In effect, there is an emerging consensus that a more careful and balanced approach to the management of cross-border capital flows is warranted. Before exploring these restraints and the legal and policy framework in which they have evolved, it is necessary to first provide a general overview of the current global financial landscape. This chapter does so by introducing the key pillars of the system – capital flows, the IMF and financial liberalisation – before elaborating on why this traditional approach to free capital flows has slowly but consistently shifted over time.