Courtesy Reuters

The Capital Truth: What Works for Commodities Should Work for Cash

Jagdish Bhagwati insists that trade in dollars is fundamentally different from trade in widgets or any other commodity -- so different, in fact, that governments should restrict the global flow of capital even while they vigorously promote free trade in goods and services ("The Capital Myth," May/June 1998). However, Bhagwati's argument for controls on the free flow of currency for buying and selling assets is unconvincing. First, he fails to acknowledge that the case for the free movement of dollars mirrors that for free trade in widgets (and that the same logic applies to both). Take California and Texas, states that enjoy both free trade and free capital flow. Residents of both states benefit from the fact that neither state must make all the goods it needs for its own use. Instead, the more efficient state produces widgets for both, resulting in a cheaper widget. The effect on capital is similar; Californians looking for investments are not limited to their own savings but can draw on Texan money. Free capital movement offers borrowers in both states a deeper reserve of savings and gives investors more investment opportunities. Stopping this flow of money would make no more sense than would halting the movement of goods and services.

At the international level, a similar argument applies, although influenced by changing exchange rates and differences in legal systems. Conceptually, therefore, those who argue for free trade internationally should also advocate the free flow of capital across national borders. If savers and investors in Los Angeles and Dallas benefit from access to each others' resources, why should similar benefits not be available to their counterparts in Sao Paulo, Beijing, or Canberra?

Bhagwati also ignores one of the most profound economic developments of the last quarter-century: the expansion of international capital flows and the resultant benefits to the world economy. It is true that further liberalization of financial markets will only succeed if preceded by a strong institutional framework. But it is also true that policymakers

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