Wednesday, March 09, 2005

HOW CHINA DOES IT


As promised a while ago, here is some of my recent work on the role of China's capital account controls in its remarkable economic development of the past quarter century.

Despite being heralded as a model globalizer, China's economic evolution is more aptly described as a closed economy that as moved from a system of direct to indirect controls. These institutional changes have allowed greater efficiency in price determination and therefore resource allocation throughout most of the Chinese economy, however the Chinese government still retains elaborate and pervasive controls to mediate the movement of financial capital in and out of its economy. These controls on capital flows have been essential to China's remarkably stable macroeconomic performance, and thus to its long-wave of rapid economic growth--a conclusion that can be drawn from comparison with many of China's neighbors afflicted by financial crises in 1997-1998.

The paper also provides a succinct overview of the risks associated with liberalized international capital flows and the rationales for for proactive management of capital flows.

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