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Beggar-Thyself versus Beggar-Thy-Neighbor Policies: The Dangers of Intellectual Incoherence in Addressing the Global Financial Crisis

Stiglitz, Joseph E.

The global financial crisis that began in Thailand on July 2, 1997, has now grown far larger than almost anyone expected at the time. What many expected to be no more than a slight blip in the unrelenting advance of international capital markets has instead become the gravest threat to the stability of the world's market economy since the Great Depression. As recently as three months after the Thai crisis, the IMF at its annual meetings called for an expansion of its charter to allow it to promote capital market liberalization. In his address to that meeting, to be sure, the IMF's managing director was careful to note that important precursors--such as strong financial markets--had to be put into place before full capital market liberalization could take place. Today, 16 months into the crisis, there is a wider recognition of just how important those precursors are and of how few developing countries (and perhaps developed countries as well) satisfy those preconditions. Furthermore, many now worry that with or without those preconditions in place, short-term capital flows may be so volatile as to contribute greatly to international economic instability and that indeed such flows might be at the root of the current crisis. Although the risk of these short-term capital flows are now more apparent, there is scant evidence that these flows bring benefits that are commensurate with those risks.

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Southern Economic Journal

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April 17, 2013