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Would you recommend liberalizing capital flows in a developing economy with a relatively low savings rate?...

Would you recommend liberalizing capital flows in a developing economy with a relatively low savings rate? Explain why or why not.

(Interational Macroeconomic)

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Answer #1

Liberalization of capital flows will help a developing economy in increasing its investment rate if the domestic savings rate in the economy is low. However, this increases the flow of hot money in the economy increases currency volatility and make the economic growth of the developing nation volatile. Thus, it has been observed that many developing nations in the wake of globalization have liberalized capital flows, however, there are various restrictions on the maximum amount of the foreign investment allowed in some sectors, also in sensitive sectors of the economy no foreign investment is allowed.Thus, restrictions and regulations help in controlling the currency and economic growth rate of developing nations.

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