The value of a currency relative to another is represented by its exchange rate, which is determined by the capital account and the current account and the respective level of inflation within or between the countries concerned. Theoretically, capital account liberalization benefits the countries that adopt it; in practice, however, some distinctions need to be made on the consequences to which it leads. Typically, in developing countries, capital account liberalization provokes massive foreign inflows in the early stages of the onset, then the trend reverses putting pressure on the exchange rates. Without effective control, the inflows will create a dubious appreciation of the domestic currency, which will heighten the susceptibility to run a current account deficit, and thus, if, but not exclusively, the expected outcome is realized, dwindle investors' confidence, which may invest out of the currency, and thus, cause a sharp contraction. Another factor that compound such concomitant pressure on the exchange rate is the herding behavior of investors; investors' decisions may be irrationally influenced by those of other investors. The countries that seek to liberalize their capital account need to take careful steps in order to reap the benefits of capital account liberalization; they need not only sound macroeconomic policies, but also proper regulation, capitalization and management of the financial system; other factors, to name a few, are rule of law, less government intervention in the economy, except to subsidize key industries. Only in such an environment, can the classic benefits of capital account liberalization, without significant ulterior costs, be realized, such as better allocation of savings to productive investments. Moreover, improvements in governance, whether corporate or public governance, in the financial sector and in macroeconomic policies contribute to higher growth, which are likely to be improved through capital account liberalization. Countries with among the less “westernized” economies, government and financial systems should think twice before opening up, albeit, if they meet the necessary conditions, they should adopt capital account liberalization as soon as possible.
Why does everybody always assume I'm an anarchist? I'm a stalinist so that means most anarchists hate me and I tend to hate most anarchists (as far as hating someone goes) for their petty-bourgeois kiddy ****.
