Capital Account Convertibility Under The Perspective Of Institutional Economics

One of the most obvious sign of the world economy in the twenty-first century is that the international finance develops rapidly and the international capital flows furiously. As a developing country, it is important for China to adapt the trend of economic globalization in such an international circumstance so that it could lay a solid foundation for the change of growing up to a powerful country of economy and politics. The process in China to adapt the trend is at the same time the process of self-change and the latter accelerates since China became a member of WTO. The self-change includes the opening of RMB current account, the reform of finance department, etc. and all of these changes make a request of re-discuss of the fact whether we should control the RMB capital account or not and how we should control it.This paper reviews the phenomenon of the foreign trade promotes economic growth in China, and expounds that we have to alter the system in which controlling the capital account by administrative means because we have to make the trade credit more effective. Plus, the request of the RMB Internationalization, making up for gaps in technology and management, improving the status of the control of capital account and the financial system also need us to alter the ways to control the capital account. In according with the necessary and sufficient conditions of the institutional reform in the institutional change theory, the paper comes to a conclusion: the capital account liberalization in China is inevitable.The paper views the capital account liberalization as a process of institutional change and makes the analysis of the interest we could get after the opening of capital account respectively. Also analyses the cost during the reform meanwhile compares the interest and the cost. Comes to a conclusion: according to the theory that reform may occur only if the expected return is bigger than the possible cost, the RMB capital account liberalization is definitely going to happen.The following after the definition of the expected return and the possible cost is how to get the expected return and avoid the possible cost, that is the path selection of the capital account liberalization. Obviously before the selection the paper reviews the preconditions which China has right now and the disadvantages. Then describes the two ways of the capital account liberalization: the gradual one and the radical one. Because of the path dependence of the institutional change theory, the institutional development and the going on financial crises, the RMB capital account liberalization is going to be on the path which chose at the first place, the gradual liberalization. The characteristics of the gradual liberalization are: the compulsive institutional change; the different sequence of the capital account liberalization. And testifies the correctness of the gradual liberalization by the economic development after the opening of the capital account.At the last makes policy recommendations to the capital account liberalization in China in two aspects: mandatory or induced institutional reform and the design of institutions. We have to change our mind from mandatory reform to induced reform and make changes to the design of institution based on the changes of economic environment and information. The paper chooses Korea as the typical developing country which reformed gradually before the year 2006. Gives the reasons about the capital account crisis happened in Korea in 1997: the drawbacks of the economic basis and financial system; the influence of the financial crisis outside Korea. Learns lessons from Korea: fragility may occur in the economic system because of the path dependence happened since the adaptive expectations might influence; according to the importance of implementation mechanism in the institutional system, clarifies the importance of financial regulation in the economic system.