Sequencing Capital Account Liberalization In Developing Countries From The Currency Crisis Perspective

Capital account liberalization is an important proposition in International Economics, and also the attention focus of academic researchers and policy makers. Iceland was the last industrialized country to liberalize the capital account, and from then on the study on capital account liberalization was related closely to developing countries. Through reviewing the literature domestic and overseas, I find that the early study on capital account liberalization is mostly related to economic growth, that is, whether capital account liberalization is beneficial to economic growth. After several crises in 1990s, more and more emphases have been put on the negative influences caused by capital account liberalization, that is, more and more study has started from the perspective of risk management. But these papers either only used the qualitative methods or did not bring the study into the background of economic globalization. This dissertation just starts from the perspective of economic globalization, and I think that capital account liberalization is inevitable for developing countries, on the other hand, capital account liberalization may easily result into the currency crisis. So developing countries should pay more attention to the construction of prerequisites and liberalize the capital account with proper sequences. In detail, the main contents of this dissertation are as follow:Chapter One is the introduction, and the study background, the study methods, the study goals, the data sources and the route chart are presented in this chapter.In Chapter Two the theories and literature concerned are reviewed, and this chapter is the theoretical foundation of this dissertation. Firstly, the definition of capital account and capital account liberalization are presented, and the measurement of capital account liberalization is summarized. Secondly, through the literature review on capital account liberalization and economic growth, I find that the research results are not same, and this means economic growth can not explain the reason why developing countries want to liberalize the capital account well. Thirdly, with the development of the Sequencing Theory, most researchers have agreed that developing countries should liberalize their capital account with proper sequences. The researchers have presented different sequences from different viewpoints, but few are from the perspective of controlling the currency crisis. Finally, the related theory of the currency crisis is reviewed, and I find that capital account liberalization definitely has the negative influence on the currency crisis. Furthermore, the liberalization of different capital sub-accounts has different influence on the currency crisis, and this provides necessary theoretical foundation for succedent empirical study.In Chapter Three the induced cause of capital account liberalization in developing countries is studied. At the background of economic globalization and with the development of international trade, new characters have emerged in developing countries' capital account liberalization. Through the study on liberalization degree of current account and capital account in sample countries, I find that there is a close relation between them and current account liberalization has the induced effect on capital account liberalization in developing countries, that is, the liberalization degree of capital account will also rise with the raise of liberalization degree of current account in developing countries.Chapter Four aims at the construction of necessary prerequisites before liberalizing the capital account in developing countries. I find that some prerequisites are necessary for developing countries to liberalize their capital account via the comparative study on some sample countries and empirical study using the method of panel data. Otherwise, liberalizing the capital account would result into the currency crisis instead of the anticipative effects. At the same time the extent of negative influences on the currency crisis lies on the macroeconomic foundations. The perfect macroeconomic foundations could reduce the occurrence probability of the currency crisis, and the bad foundations could magnify the probability. Therefore, in order to avoid the occurrence of the currency crisis, the essential prerequisites for capital account liberalization in developing countries are internal and external macroeconomic equilibrium and domestic financial reform.In Chapter Five the sequences of capital account liberalization in developing countries from the perspective of the currency crisis are presented. The study on sequencing capital account liberalization mainly involves three aspects: the sequence between capital account liberalization and other macroeconomic reform policies; the sequence between current account and capital account liberalization; the sequences among sub-accounts liberalization. The conclusion can be drawn from Chapter Four that capital account liberalization should be enforced in the latter phase of macroeconomic reform. Through the comparative study on sample countries and empirical study from the currency crisis, the proper sequences of capital account liberalization in developing countries should be: liberalizing the current account prior to capital account; liberalizing the capital inflow prior to capital outflow; liberalizing the direct investment prior to portfolio investment; liberalizing the debt investment prior to equity investment in the portfolio investment.In Chapter Six China's capital account liberalization is studied. In 1996 China accepted IMF's Article VIII and liberalized the current account. With the raise of liberalization degree of current account, China's capital account has become more and more liberalized. China's capital account liberalization is not only be led by the imposed policies but also induced by current account liberalization. China's capital account liberalization also has the negative influence on the currency crisis according to the empirical study, but China's good macroeconomic foundations have greatly reduced this negative influence. So China must pay more attention to the construction of prerequisites and should enforce the macroeconomic reform before liberalizing the capital account. Meanwhile, in order to keep the currency crisis away, the sub-accounts which have less negative influences should be liberalized prior to those which have more negative influences. In fact, China's capital account liberalization has followed this rule, and the coming emphasis should be put on the liberalization of short-term capital flow. At the same time, the dynamic monitoring system on capital account liberalization should be constructed.