Notes From The Margin

October 4, 2007

Capital Account Liberalisation – Good or Bad?

 

 

An interesting debate happened in the house of assembly this week with the passage of the Central Bank of Barbados (Ammenment) Bill 2007. At issue is whether liberalisation of the capital account is a good or bad thing for Barbados. (In layman’s terms, the Capital account deals primarily with large sums of foreign exchange  such as for investment in projects or in real estate, etc.) Two contributions to the debate stood out. (at least in the media)

The first was that of Clyde Mascoll:

“Mr. Mascoll says while there is uncertainty about how much capital investment will go out and how much will come into the country; the net effect should be in Barbados’ favour. He adds that the open market will however call for a measure of fiscal consolidation. “

 

The second was by Opposition  spokesman Dr. David Estwick:

 

“The more liberalised the capital account becomes, the greater is your flexibility needed on the exchange rate,” he warned, noting that when studies were done by Mona Campus’ Professor Wint they showed that the regional economies with liberalised capital accounts had done worse than those without such liberalisation.

 

…He advised that to make capital account liberalisation work in Barbados, Government must correct its problems in the non-banking sector and allow for less collusion and restriction in the stock market.

 

Most of the concerns that we on the margin have heard about the liberalisation of the Capital Account tend to centre on the ability of the Government to conduct the level of policing and regulation that a liberalised environment will require.  It is important that the government move to address the level of confidence that the public has in its abilities over the coming weeks.

 

From reading the debate two things become clear, first – no one REALLY knows what will happen when the controls come off. It seems to be boiling down to a “the glass is half full or half empty” type of arguments.  It seems that the good times can be very very good and the bad times will be very very bad, and the pundits are split on whether there will be good or bad times.

 

The second thing that has become clear is that Governments of Barbados from here on out will have to manage the economy far more prudently than before.

 

Because last week what really happened, is that we very deliberatly removed one of the main safety nets under the tightrope that government must walk  on from here on out.

 

We can only hope that they are up to the task.

 

Margina

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5 Comments »

  1. This will work out just fine. The opposition is there to do what? Oppose!

    Comment by Anonymous — October 4, 2007 @ 11:58 am | Reply

  2. NFTM, I think you are being a bit dramatic with your comment that: “Because last week what really happened, is that we very deliberatly removed one of the main safety nets under the tightrope that government must walk on from here on out.”, if you are referring to the power of the Minister to give directions to the Central Bank on the setting of interest rates.

    You are quite right when you say that no one can say exactly how the market will respond. I think that your summary of the 2007 IMF Art. 4 Consultation Report on Barbados makes the point that how the economic fundamentals are managed to mitigate risks will be critical, which is the basic point that Dr. Estwick made.

    Mascoll’s comment about the need for fiscal consolidation is deliberately vague, but most discerning readers will understand what he means. There are no free lunches, but there will always be difficult tradeoffs.

    Comment by Linchh — October 4, 2007 @ 4:12 pm | Reply

  3. Linchh,

    You would have to admit that the ability to set interest rates is a key policy tool.

    Would you care to elucidate on your understanding of Mascoll’s “Fiscal consolidation” comment?

    Marginal

    Comment by notesfromthemargin — October 5, 2007 @ 1:54 am | Reply

  4. NFTM, all I am saying is that in speaking of “fiscal consolidation”, Mascoll is invokng the proposals mentioned by the IMF staff in the 2007 Art.4 Consultation report that you discussed in a separate blog. I did not hear Mascoll or read his statement, so I cannot say which of those proposals he embraced, and which he rejected.

    Comment by Linchh — October 7, 2007 @ 12:48 pm | Reply

  5. […] spoken about on the margin already. It does seem to be a judgement call. As we said in our post Capital Account Liberalisation – Good or Bad? it seems that no one REALLY knows what will happen when capital controls come off. Prof. Howards […]

    Pingback by Economic Advice From Prof. Howard « Notes From The Margin — January 31, 2008 @ 9:09 pm | Reply


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