Publications by Author: Cooper, Richard N.

Unless certain conditions are met, serious misallocation could occur if capital movements are fully liberalized; and considerable vulnerability is created for economies where the exchange rate is strongly influenced by changes in sentiment by owners — residents as well as non–residents — of liquid assets. Countries in this condition — most of them in today's world — may find themselves having to make an uncomfortable choice between tieing their currencies strongly to a major currency, e.g. with a currency board, and maintaining restrictions on capital movements, particularly those that are subject to rapid changes in sentiment and are easily reversible.

Over this quarter century the American economy experienced higher rates of participation in the labour force, especially by women, and a decline in the share of children in the population; a relative growth of non–wage income, especially but not exclusively pension income; and lower savings rates. Allowing for these factors implies an increase in the average real wage rate of nine percent, still way above the official figure.

A rapid move to currency convertibility by the transforming countries of eastern Europe does not seem to have hurt those countries that undertook it compared to those that moved more gradually. Indeed, on balance they seem to have performed better. Yet the evidence is not conclusive, and the number of observations too few to make strong conclusions, after allowance is made for other differentiating features among countries.

Western European countries almost surely could have moved to currency convertibility more rapidly than they did in the 1950s, especially if arrangements had been made for partial funding of the sterling balances held by Commonwealth countries, but the intellectual climate and political consensus were not present for making the move.

The experience of the eastern European countries in the early 1990s, although admittedly embedded in special circumstances, at least raises strong doubts about the justification for preserving exchange controls in many developing countries. A much heavier burden of proof should be levied on those countries by the international community and in particular by the International Monetary Fund, whose Articles of Agreement call for convertibility as a basic condition for membership.

Growth in developing countries, particularly that brought about through trade liberalization, will affect developed countries in many ways, mostly to their benefit. Trade liberalization will directly increase incomes in developed countries. It will also cause some dislocation, but that will be small relative to the numerous other distrubances to modern economies, and can be handled at relatively low cost when the required adjustments are phased in over time.