A quarterly magazine of the IMF

June 2001, Volume 38, Number 2

Recent financial crises have sparked considerable debate about the benefits and possible risks of international capital flows. While foreign direct investment (FDI) is generally considered favorably, other flows of capital are viewed with some suspicion. In our first article, Deepak Mishra, Ashoka Mody, and Antu Panini Murshid take a look at the relationship between capital flows and investment, their links with growth, and the impact of the volatility of flows on growth. They conclude that even though capital flows can impose costs, when harnessed effectively they can boost investment and spur growth. Prakash Loungani and Assaf Razin strike a cautionary note in their article, observing that although there is strong evidence that FDI benefits countries, they should assess its potential impact realistically. Although capital flows to developing countries can provoke the most controversy, they are dwarfed by flows to industrial countries. Reint Gropp and Kristina Kostial look at one issue that may be critical in the debate—governments' ability to tax the mobile capital of multinational enterprises.

The new U.S. administration came to office announcing its commitment to tax cuts. In a Point of View article, Ronald McKinnon of Stanford University looks at some of the possible consequences of this policy, both domestically and in terms of its impact on the U.S. current account deficit.

What is termed the "bipolar view" of exchange rates—that countries should move from crisis-prone "soft" pegs for their currencies to either hard pegs or floating regimes—is examined by Stanley Fischer, who concludes that this trend is likely to continue both for countries that are well integrated into capital markets and for those that are not.

Russia and the new nations of Central and Eastern Europe continue to face many challenges as they make the transition to market economies. In Russia's industrial sector, Harry G. Broadman writes, industrial reform is still hampered by business structures and barriers to entry that do not permit robust competition from new enterprises. György Szapáry considers the exchange rate regime that would best serve the interests of the transition countries that are seeking to join, first, the European Union and, subsequently, European Economic and Monetary Union. Latvia is one of the transition economies that has progressed the furthest along the road to EU membership. Roberts Zile and Inna Steinbuka review some of the remaining hurdles Latvia must surmount before membership.

Globalization as a term has a new currency, but the concept of global integration has a longer history. In a guest article, Paul Streeten observes that, in many respects, the world economy was actually more integrated at the end of the nineteenth century than it is today. Other articles in this issue discuss the "new economy," the role of private enterprise in poverty reduction in developing countries, the link between macroeconomic policies and poverty reduction, and moral hazard. Our Financial Focus is on the topic of crisis resolution and private sector adaptation.

Ian S. McDonald
Editor-in-Chief