Gallagher Co-authors Policy Brief

July 7, 2014

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Prof. Kevin Gallagher of the Frederick S. Pardee School of Global Studies who also co-directs the Global Economic Governance Initiative (GEGI) has co-authored a new GEGI Policy brief on capital account liberalization in China. Written along with Jose Antonio Ocampo from Initiative for Policy Dialogue at Columbia University and Ming Zhang and Yu Yongding from the Institute for World Economics and Politics at the Chinese Academy of Social Sciences, the paper serves as an introduction to a larger report of the Task Force on Regulating Capital Flows for Long-Run Development to be released this Fall.

The policy brief, titled Capital Account Liberalization in China: A Cautionary Tale, is set in the context of leaders from the United States and China who will be meeting in mid-July for another round of the Strategic and Economic Dialogue (SED) between the two countries. In this policy brief  the authors argue that the leaders of the two countries should put great care into the sequencing of reform in each country:

“It is not fruitful to debate whether China should open its capital account, because the decision to move forward already has been made. However, it is still vitally important to consider how the capital acccount should be opened, and at what pace.”

Based on the economic evidence and the numerous countries that became plagued after prematurely opening their capital accounts, the authors stress that China should prioritize other financial reforms before opening its economy to the whims of global finance. The authors also urge the participants of the SED to be cautious.  While China has been prudent to ensure that its trade and investment treaties leave flexibility for China to maintain its regulation of cross-border financial flows, US treaties commonly require the deregulation of such flows. The two nations should put stability and productive growth ahead of the short term benefits of select interest groups. The paper argues that:

“fully opening the Chinese financial system will require keen attention to prioritizing other important reforms and to designing a strong and flexible set of cross-border financial regulations.”

The Global Economic Governance Initiative (GEGI) is a project of Boston University’s Pardee School of Global Studies, the Frederick S. Pardee Center for the Study of the Longer-Range Future and the Center for Finance, Law & Policy. GEGI was founded in 2008 to advance policy-relevant knowledge about economic governance for financial stability, human development, and the environment.

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