World Bank questions the wisdom of free capital flows in emerging markets

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THE WORLD BANK called yesterday for a debate on the need for capital controls on investment in developing countries in the aftermath of the Asian financial crisis.

The Bank admitted that capital liberalisation could carry risks for emerging markets.

Fred Kilby, the author of the World Bank's annual report on financial flows in the developing world, said: "There may be a case for looking at whether it is feasible or desirable to place some constraints on short- term capital flows."

The comments will guarantee a reassessment of the IMF's drive for further liberalisation of global capital markets is high on the agenda next month, when the two institutions hold their half-yearly meeting in Washington.

Yesterday's report highlighted the controls introduced by Chile in 1991 and Colombia in 1993. These in effect tax loans of short maturities. Studies suggest they have tilted borrowing towards long-term loans.

Private capital flows to developing countries reached a new record last year of $256bn (pounds 155bn). The rich OECD members cut their aid budgets from $59bn in 1996 to $55bn in 1997 or 0.25 per cent of GDP.