Foreign Capital and Economic Transformation : Risks and Benefits of Free Capital Flows

The advanced transition economies in Central and Eastern Europe have not only liberalized and reoriented their trade relations during the past decade, they have been able to attract quite substantial amounts of foreign capital. This has helped to rebuild their capital stocks which the transformation process had rendered partly obsolete. At the same time, the recent financial crises in Asia and Russia have heightened concerns about a speedy liberalization of capital flows, and controls on short-term capital flows are frequently being advocated.This study traces the evidence available from four reform countries -- the Czech Republic, Estonia, Hungary, and Poland -with capital market integration. Its main result is that domestic policies can have a substantial impact on the structure of capital flows and on the ability of emerging markets such as the transition economies to deal with adverse external shocks. Taxing capital flows cannot serve as a substitute for prudent policies. The available evidence suggests, rather, that the imposition of capital controls itself can be a cause of fluctuations of exchange rates and that controls on cross-border capital flows are difficult to enforce.

Covering both the theoretical and empirical aspects of capital market integration of transition economies, this book will be of interest to scholars and students of economics, to international and national organizations dealing with economic issues, and to research institutes, banks and financial institutions.