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POLI 243 (70)
Chapter 25

Political Science Chapter 25 Summary.docx

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Political Science
POLI 243
Mark Brawley

Political Science Chapter 25 Summary - After liberalization of financial markets across the globe, countries who followed their advice were swept up in enormous international financial crises - As countries struggled to respond to mess in financial markets, Malaysia reversed course from market liberalization and instituted capital controls. Capital controls are legal restriction on movement of investment capital into or out of a country - Capital controls made investors put money elsewhere, distorted investors decisions by forcing them to calculate risks based on non-market factors - Those in favour of capital controls argued markets are not always stable so these investments are mostly short-term flows capturing profits by exploiting shifting exchange rates; market effects of short-term flows were too disruptive w/ few benefits for economically developing countries and often introduced great risk - They needed foreign capital but in long-term investments Malaysia Turns Its Back on the IFIs - Country ran a deficit it could only afford to run deficit by continued inflows of foreign capital - Financial crisis and investors taking away money, all else did not change - Knowing investors would be shy for some time IFIs considered longer-term horizon and argued against capital controls saying it would dissuade investors from returning. They urged same sort of policies for all countries: decrease gov’t spending, reduce imports while increasing exports, amass foreign exchange and improve standing in the eyes of creditors - Malaysia rejected this advice and introduced capital controls in order to prevent further speculation against Malaysia’s currency (the ringgit) and to prevent further capital flight (blocking portfolio investments could not leave) - Gov’t did however peg the exchange rate - It fixed exchange rate and controlled capital flows—Mundell-Fleming model—so gov’t regain autonomy over domestic monetary policy The Pressure for Conforming to Orthodoxy - Policy IFIs did was to gi
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