Martin Wolf asks:
Must large capital inflows always end in crisis?: The question I wish to pose for the next two weeks is whether it is possible for countries to accept large net inflows of capital from abroad, without ending up in crisis. If not, how do we manage a world of capital mobility?...
The answer, however, is "yes." If you:
- Borrow in your own currency; and
- Keep a reasonably tight rein on the leverage of your banks, real-estate firms, and operating companies;
then you an accept large net inflows of capital from abroad without ending in a major crisis.
And, of course, even if it does end in crisis the large net inflows may have done more good beforehand than is done by the harm of the crash. It depends: On what terms was the money offered? How does the workout proceed?