Capital flows have become globalization’s Achilles heel. Over the past 25 years, devastating currency crises have hit countries across Latin America and Asia, as well as countries just beyond the borders of Western Europe — most notably Russia and Turkey. The economics profession has failed to offer anything resembling a coherent and compelling response to currency crises.
International Monetary Fund (IMF) analysts have, over the past two decades, endorsed a wide variety of national exchange-rate and monetary-policy regimes that have subsequently collapsed in failure. They have fingered numerous culprits, from loose fiscal policy and poor bank regulation to bad industrial policy and official corruption. The financial-crisis literature has yielded policy recommendations so exquisitely hedged and widely contradicted as to be practically useless. Anti-globalization economists have turned the problem on its head by absolving governments (except the one in Washington) and instead blaming crises on markets and their institutional supporters, such as the IMF — “dictatorships of international finance,” in the words of the Nobel laureate Joseph Stiglitz.
Is this right? Are markets failing, and will restoring lost sovereignty to governments put an end to financial instability? This is a dangerous misdiagnosis. In fact, capital flows became destabilizing only after countries began asserting “sovereignty” over money — detaching it from gold or anything else considered real wealth. Moreover, even if the march of globalization is not inevitable, the world economy and the international financial system have evolved in such a way that there is no longer a viable model for economic development outside of them.