April 7 - April 7, 2009 POLI 243 Econ Relations...

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April 7, 2009 POLI 243 – Econ Relations Malaysia and Capital Controls *mixture of monetary relations and international investment issues The Washington Consensus (early 1990s) (it is called Washington consensus because these are the ideas that became accepted at the time) - Cold War ends o Ended without major conflict largely because the USSR collapsed (including the economies of their satellite states) o Began more reflection on what caused economies to succeed Concluded that more open economies worked better than heavily monitored/regulated economies – notion that the systemic/ideological constraints in the USSR were bad - Systemic and ideological constraints change - Neo-liberal models dominate - IMF and World bank (international financial institutions – IFI) encourage: o Free trade o Open capital markets Forget ISI, open up your markets Allow international investment to flow in, allow FDI (foreign direct investment) o Almost all developing countries were pushed to adopt these policies, and most adopted them to some extent Advantages and Disadvantages - Capital flows increase – international investment is up o This helps developing countries to raise capital to develop economies, often leads to economic growth - Increased vulnerability to debt crises
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o When international investment increases, it always involves a reverse flow of that money (bank makes deal with borrower that it will get more money back than it lent you originally); thus, capital must flow back plus interest to the original lender o Potential risks Loan could be made on poor basis - loan made based on assumption it will be used wisely and you’ll get it back (sometimes the business fails, etc, and you don’t get your money back) Currency could fluctuate to your detriment – you have to pay
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April 7 - April 7, 2009 POLI 243 Econ Relations...

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