The IMF (fairly) recently published a brief on Globalization here, which identifies several general principles that “seem to underpin greater prosperity”. These include the following:
- Investment (particularly foreign direct investment);
- The spread of technology;
- Strong institutions;
- Sound macroeconomic policies;
- An educated workforce; and
- Participation in, and integration with, the global economy.
The paper also discusses the implications of more integrated financial markets, citing two main findings of a recent IMF paper on the subject:
- Countries must do a careful cost-benefit analysis (CBA) before they fully liberalize capital flows; and
- There are costs associated with being too conservative on opening capital flows.
The policy lesson to be drawn then is that capital account liberalization “should be pursued as part of a broader reform package encompassing a country’s macroeconomic policy framework, domestic financial system, and prudential regulation”.
