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Managing Global Financial Flows at the Cost of National Autonomy: China and India

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  • Sunanda Sen

Abstract

The narrative as well as the analysis of global imbalances in the existing literature are incomplete without the part of the story that relates to the surge in capital flows experienced by the emerging economies. Such analysis disregards the implications of capital flows on their domestic economies, especially in terms of the "impossibility" of following a monetary policy that benefits domestic growth. It also fails to recognize the significance of uncertainty and changes in expectation as factors in the (precautionary) buildup of large official reserves. The consequences are many, and affect the fabric of growth and distribution in these economies. The recent experiences of China and India, with their deregulated financial sectors, bear this out. Financial integration and free capital mobility, which are supposed to generate growth with stability (according to the "efficient markets" hypothesis), have not only failed to achieve their promises (especially in the advanced economies) but also forced the high-growth developing economies like India and China into a state of compliance, where domestic goals of stability and development are sacrificed in order to attain the globally sanctioned norm of free capital flows. With the global financial crisis and the specter of recession haunting most advanced economies, the high-growth economies in Asia have drawn much less attention than they deserve. This oversight leaves the analysis incomplete, not only by missing an important link in the prevailing network of global trade and finance, but also by ignoring the structural changes in these developing economies--many of which are related to the pattern of financialization and turbulence in the advanced economies.

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Bibliographic Info

Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_714.

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Date of creation: Apr 2012
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Handle: RePEc:lev:wrkpap:wp_714

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Related research

Keywords: Global Current Account Imbalances; Impossible Trinity; Capital Mobility; Official Reserves; Monetary Policy; National Autonomy; Efficient Market;

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  1. Volz, Ulrich & Reade, J. James, 2011. "Chinese Monetary Policy and the Dollar Peg," Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48740, Verein für Socialpolitik / German Economic Association.
  2. Thomas I. Palley, 2009. "Rethinking the Economics of Capital Mobilityand Capital Controls," IMK Working Paper 01-2009, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  3. Patnaik, Ila & Shah, Ajay, 2010. "Asia Confronts the Impossible Trinity," ADBI Working Papers 204, Asian Development Bank Institute.
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