Advantages Of The Free Movement Of Capital

1053 Words3 Pages

The free movement of capital is pursued as an economic development plan. It is based around the belief that if you want the benefits of foreign trade and investment in your export sectors, then there must be an ability to move money across borders. The idea that free movement of money is good for developing countries is because it can benefit capital scarce economies, creates a more efficient allocation of capital, creates competition by allowing local interest rates to approximate to international ones, adjusts to the comparative advantage with free trade, and forces governments to be held accountable and behave responsibly since industries can easily move elsewhere. However, the free movement of money across borders has the tendency to have more value than the goods and the costs, generally, outweigh the benefits. The free movement of capital poses too heavy of risks for a developing country to endure.
The free movement of capital, is generally, a harmful policy for developing countries to pursue. This is because the free movement of capital creates high vulnerability to market volatility, which is often very severe and difficult to combat. As a result, …show more content…

This is called the Dutch Disease. This is an excessive capital inflow that creates inflation. This is problematic because it causes exchange rate overvaluation, small sectors to lose export competitiveness, a devaluation can occur if the flow reverses, and can easily destroy a competitive manufacturing sector. There is a multitude of options to counteract an excessive inflow such as exchange rate sterilization, increasing taxation and holding the money, imposing tariffs and restricting the inflow from abroad. However, all of these options can easily cause the inflation to worsen and are politically dangerous, especially if your country’s living standards are very

Open Document