There are investments (including even long term portfolio investments
and venture capital) - and there is speculative, "hot" money.
While "hot money" is very useful as a lubricant on the wheels of liquid
capital markets in rich countries - it can be destructive in less
liquid, immature economies or in economies in transition.
The two phenomena should be accorded a different treatment. While long
term capital flows should be completely liberalized, encouraged and
welcomed - the short term, "hot money" type should be controlled and
even discouraged. The introduction of fiscally-oriented capital
controls (as Chile has implemented) is one possibility. The less
attractive Malaysian model springs to mind. It is less attractive
because it penalizes both the short term and the long term financial
players. But it is clear that an important and integral part of the new
International Financial Architecture MUST be the control of speculative
money in pursuit of ever higher yields. There is nothing inherently
wrong with high yields - but the capital markets provide yields
connected to economic depression and to price collapses through the
mechanism of short selling and through the usage of certain
derivatives.
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