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A quarterly magazine of the IMF
  March 2007
Volume 44, Number 1

The Two Faces of Financial Globalization

Beyond the Blame Game

M. Ayhan Kose, Eswar Prasad, Kenneth Rogoff, and Shang-Jin Wei
This issue of F&D explores different aspects of financial globalization—the phenomenon of rising cross-border financial flows—its macroeconomic effects and its implications for growth and financial stability. Financial globalization is often blamed for the string of damaging economic crises that rocked a number of emerging market countries in the late 1980s and 1990s. This article gets beyond the polemics to provide a framework for analyzing the growing body of studies about the costs and benefits of financial globalization.

The Paradox of Capital
Eswar Prasad, Raghuram Rajan, and Arvind Subramanian
According to standard economic theory, financial capital should flow from richer to poorer countries in search of unexploited investment opportunities, improving employment and income in the poorer countries. But in fact capital has been flowing in the opposite direction. The authors examine the reasons for this paradox and look at whether foreign capital really promotes growth in developing countries.

Point of View
Converting a Tiger
Yaga Venugopal Reddy
India's central bank governor describes how India, beginning in the early 1990s, gradually liberalized its capital account after 40 years of controls and central planning. Its cautious approach reflected recognition that capital account liberalization carries the potential for currency crises and other problems.

Wising Up About Finance
Leslie Lipschitz
Given that global capital markets make it more difficult for countries to assess, diagnose, and prescribe macroeconomic policies at the national level, it is increasingly important that the financial aspects of national economic analysis become more sophisticated.

The Changing Face of Investors
Ceyla Pazarbaşıoğlu, Mangal Goswami, and Jack Ree
Cross-border asset accumulation has risen dramatically over the past decade, with global capital markets increasingly integrated as a result of liberalization and advances in technology. The authors examine the accompanying change in the global investor base and assess the implications for financial stability of the huge increase in global capital flows.

spacer Point of View
Dealing with Global Fluidity
Mohamed A. El-Erian
With new forces shaping global capital markets, participants in international finance are well advised to rethink their operating models. These forces have fundamentally altered the marginal determinants of global growth, trade, price formation, and (internal and cross-border) capital flows.

Also in This Issue

From Credit to Crops
Stijn Claessens and Erik Feijen
New research suggests that there is a direct channel between financial development and hunger: better access to financial services helps farmers boost productivity, which in turn increases the food supply and lowers food prices.

Back in the Fast Lane
Indermit S. Gill and Homi Kharas
Only a decade after the Asian financial crises of the mid-1990s, Korea is a high-income country, and Indonesia, Malaysia, the Philippines, and Thailand have achieved middle-income status. But are Asia's high growth rates sustainable? The reality is that middle-income economies grow more slowly than rich or poor ones. To join the ranks of high-income countries, East Asia's success stories will have to adjust their growth strategies.

Time to Master Disaster
David Hofman
Natural disasters can have far-reaching negative effects on macroeconomic conditions in affected countries, especially in smaller and developing countries. But innovations in catastrophe insurance markets can help them manage these effects, including those on their public finances.

The Euro: Ever More Global
Axel Bertuch-Samuels and Parmeshwar Ramlogan
Since its launch in 1999, the euro has become the world's second most important currency after the U.S. dollar. But to become a truly international currency, the euro must be used outside the immediate vicinity of the euro area. Its future role will also be affected by adjustments in global imbalances and a shift in global asset allocation.


Letter from the Editor

Letters to the Editor
Deficits can harm growth; Trade deficits and lost keys; Africa and bilateralism

In Brief

IMF takes a "major step" on key financial indicators
Curbing impact of disasters
Plant a tree: save the world
GAVI commits $500 million for health systems

People in Economics

A Master of Theory and Practice
James L. Rowe
With a career straddling academia and policy, economist Guillermo Calvo has shed light on time inconsistency and emerging market crises and theorized about—among other subjects—structural unemployment, international trade, and the economics of justice.

Picture This

Global Capital Flows: Defying Gravity
Mangal Goswami, Jack Ree, and Ina Kota
Global capital flows, including debt, portfolio equity, and direct investment–based financing, topped $6 trillion in 2006. Global imbalances have also risen, with the United States running a current account deficit and some emerging market countries running big surpluses. A chart-based view of where the money goes.

Back to Basics

PPP Versus the Market: Which Weight Matters?
Tim Callen
Two methods for measuring countries' contributions to global growth—the purchasing power parity (PPP) exchange rate and market exchange rates—yield different results. Which one is better? When financial flows are involved, market exchange rates are the better choice, but for other variables, the decision is less clear.

Book Reviews

The European Economy Since 1945: Coordinated Capitalism and Beyond, Barry Eichengreen

Solar Revolution: The Economic Transformation of the Global Energy Industry, Travis Bradford

Monetary Theory and Bretton Woods: The Construction of an International Monetary Order, Filippo Cesarano

Straight Talk

Aid Can Work
François Bourguignon and Mark Sundberg
Despite attacks on the effectiveness of aid, the columnists argue that there are strong grounds for believing that aid fosters development. Moreover, a new aid model seems to be emerging that should lead to better aid effectiveness.

Country Focus

As one of the world's leading exporters of mining commodities, such as coal and iron ore, Australia has been adjusting its macroeconomic policies to the recent large rise in international commodity prices.