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Reasons for Limited Sovereign Risk Management and How to Improve It

Claessens, Stijn

For capital market liberalization in developing countries, the returns have been difficult to identify: there is no convincing empirical evidence linking open capital markets to economic growth. There is however, considerable evidence of increased risk. Capital market liberalization increases consumption volatility and heightens countries' vulnerability to crises. The poor are least equipped to cope with increased volatility, and they are most affected by financial crises. Capital mobility reduces their bargaining power relative to capital and leads to a decline in the labor share of output. Financial openness delivers the poor few benefits in terms of increased access to credit and other financial services, and it constrains governments' redistributive efforts and anti-poverty fiscal policies. While it is difficult to establish a conclusive direct link between capital market liberalization and increased rates of poverty, the evidence presented in this paper suggests a compelling case that capital market liberalization is bad for the poor in developing countries.

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More About This Work

Academic Units
Initiative for Policy Dialogue
Publisher
Initiative for Policy Dialogue
Series
Initiative for Policy Dialogue Working Paper Series
Published Here
February 2, 2010

Notes

The opinions expressed in these papers represent those of the author(s) and not The Initiative for Policy Dialogue. These papers are unpublished and have not been peer reviewed. Please do not cite without explicit permission from the author(s).

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