Capital Account Liberalization Debates

Abstract

Abstract: The case for capital account liberalization has been the centre of outgoing debate. This paper discusses both the short term and longer term flows (FDI). This paper is divided into 5 sections. Section 1 presents the claims of neoclassical economists who believe that the case for free trade is the same as the case for capital account liberalization. They further point out that such liberalization increases social welfare and promotes efficiency. Section 2 provides the critique of the classical view as several assumptions made in traditional theory may not hold in real life. Section 3 provides the empirical evidence to claim that free capital flows lead to instability and culminate into a crisis. Section 4 explores the effects of FDI on countries and concludes that unrestricted flows may not always benefit nations. Section 5 analyses empirically the effect of FDI on inequality, long term and short term economic growth.