After holding off for decades, China has finally embraced financial globalisation, announcing recently that it would eliminate capital controls to allow unfettered short-term foreign inflows . By contrast, after decades of boom-bust cycles, Argentina is facing another macroeconomic crisis, and has finally imposed capital controls to prevent a catastrophic decline in its currency.
Consider the following counterfactual history. In the late 1990s, when China’s economic miracle was becoming evident, it could easily have succumbed to the prevailing orthodoxy on financial globalisation. To be sure, capital flows have often reflected deeper policy problems or imbalances within a given emerging market. But they are also usually the necessary transmission mechanism for crises, and thus have magnified the eventual costs to those economies.
Few economists would list financial globalisation as an essential prerequisite for sustained long-term development or macroeconomic stability. And arguments made in its favour presume that every country has already met highly demanding regulatory requirements. Most have not — and probably cannot — except over the long run.
Alternatively, the orthodoxy may owe its resilience to the power of entrenched financial interests that have stood in the way of new controls on cross-border capital flows. Wealthy elites in several countries — particularly in Latin America and Africa — embraced financial globalisation early on because they saw it as offering a useful escape route for their wealth. In these cases, policy inertia and possible reputational costs made it difficult to suddenly start advocating a reversal.