This paper analyzes the linkages between capital account liberalization and other policies influencing financial sector stability. Drawing on country experiences, the paper develops an operational framework for sequencing and coordinating capital account liberalization with other policies aimed at maintaining financial sector stability. Based on the general principles, a methodology for sequencing capital account liberalization is presented in this paper. This methodology, which is illustrated by an example, involves an assessment of capital controls and macroeconomic and financial sector vulnerabilities, and the design of a plan for sequencing capital account liberalization with financial sector reforms and other policies. Financial systems that have been weakened by inappropriate government involvement also face additional risks when operating in international financial markets. The absence of significant macroeconomic imbalances and the high level of official international reserves at the outset of the crisis also appear to be important factors preventing a full-blown exchange crisis. Nevertheless, the prolongation of the crisis lowered economic growth and ultimately led to a recession and increased the total cost of the crisis resolution.
This paper demonstrates a well-designed deposit guarantee system can strengthen incentives for owners, managers, depositors and other creditors, borrowers, regulators and supervisors, and politicians. Borrowers should be aware that they will have to repay their loans if their bank fails and will be encouraged to keep their loans current where offsetting is limited to past-due loans. The performance of insurers, regulators, and supervisors as agents will improve where they know that they can take justifiable actions without political interference and will be held accountable for their actions to their principals. Despite the improvements, and possibly partly because there are issues in deposit insurance design that remain to be resolved, financial crises have been prevalent during the 1990s. This situation has forced a number of countries to offer a blanket guarantee to restore confidence and to allow the continued functioning of the financial system while the authorities take time to design a plan for the resolution of the crisis.
This paper deals with trade policy issues of particular interest to the Fund. It is motivated both by the revival of protectionist attitudes in the industrial countries and the prevalence of liberalization proposals for developing countries. In view of Fund concerns with the functioning of the international monetary system and with individual countries’ macroeconomic policies, the paper focuses on the areas where macroeconomic policy, and especially exchange rate issues, relate to protection. Thus its discussion of the more standard microeconomic effects of protection is rather brief. The paper begins with a discussion of the relationship between protection and the current account, an issue that is particularly relevant currently for the United States.
In most countries, banks are the most important financial institutions for intermediating between savers and borrowers, assessing risks, executing monetary policy, and providing payment services. At the same time, the configuration of their portfolios makes them especially vulnerable to illiquidity and insolvency. In particular, by law, bank deposits have to be repaid at par: in addition, banks are highly leveraged and often maintain liquid assets to meet withdrawals only in normal times. In light of this vulnerability, government officials realize that the demise of one bank, if handled poorly, can spill over to others, creating negative externalities and causing a more general problem for other banks in the system. For these reasons, many governments provide a safety net for banks that generally includes deposit protection and lender-of-last-resort facilities, in addition to a system of bank regulation and supervision. Recognizing that financial stability is a public-good with regional, and even global, implications (see Wyplosz, 1999), the international community is showing an interest in deposit protection.
The proliferation of banking and financial crises during the 1980s and 1990s has led a large number of countries to institute, or consider instituting, an explicit system of deposit insurance (see, for example, Lindgren, Garcia, and Saal, 1996).2 In fact, 30 of the 72 countries now known to have an explicit deposit insurance system established it during the past decade; 49 set up their systems in the past 20 years. During the 1990s, 33 countries reformed their deposit insurance systems, often to improve its incentive structure in light of experience.3
Occasional Paper No. 38 of the International Monetary Fund contains a full review of policies, the facts about actual protectionist measures, available evidence on the costs of protection, and discussion of negotiating issues, all based on information available up to early 1985. In addition, it contains extensive further references. Furthermore, there is a thorough survey of recent developments, as well as of major protection policy issues, in the World Bank’s World Development Report, 1987. Hence the present paper deals purely with analytical issues. Nevertheless, before launching into the main discussion, something should be said about recent protectionist trends.2
A recent survey of 85 different systems of deposit protection found that of the 85, 67 countries offered an explicit, limited deposit insurance system in normal times (see Table A1 of the Statistical Appendix).46 They are the focus of the survey that follows.47 As Table 2 shows, four of the surveyed countries are in Africa, 10 are in Asia, 32 are in Europe, four are in the Middle East, and 17 are in the Americas.
It is a popular misconception that protection in the form of tariffs or import quotas must necessarily improve a country’s current account. This view is frequently put in connection with the U.S. current account deficit. It could be based on the assumption that exchange rates are fixed or, at least, that the country’s exchange rate will not change endogenously as the result of a change in protection levels. In the United States, however, the exchange rate is endogenously determined in a floating rate system. It can be shown that, in due course, it is likely to appreciate when protection is increased, unless at the same time there are changes in fiscal or monetary policy.
This 2014 Article IV Consultation highlights that economic growth in Spain has resumed, and unemployment is falling. Exporters are gaining market share, and the current account is in surplus for the first time in decades. Financial conditions have improved sharply, with sovereign yields at record lows. Business investment is rebounding strongly and private consumption has also started to recover owing to improved employment prospects and rising confidence. Executive Directors have welcomed the improving Spanish economy. They have stressed that labor market reform should be accompanied by product and service market liberalization to maximize the gains to growth and jobs.
The primary focus of this paper is on economic developments and policies in the period since the outbreak of the financial crisis. Policies adopted under the program successfully restored external stability, rebuilt reserves, and initiated reform of the financial and corporate sectors. Key indicators point to continued economic expansion. Several measures have been implemented to ease the foreign exchange and domestic liquidity constraints putting in place a working social safety net. The paper also discusses financial sector restructuring and corporate sector reforms under way in Korea.