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Friday, May 02, 2003

Reversal of Fortune

First Kenneth Rogoff, and now The Economist (subscribers only), as it explains why capital controls may be justified in developing countries:

Why is trade in capital different from trade in goods? For two main reasons. First, international markets in capital are prone to error, whereas international markets in goods are not. Second, the punishment for big financial mistakes can be draconian, and tends to hurt innocent bystanders as much as borrowers and lenders. Recent decades, and the 1990s most of all, drove these points home with terrible clarity. Great tides of foreign capital surged into East Asia and Latin America, and then abruptly reversed. At a moment's notice, hitherto-successful economies were plunged deep into recession.