On global cash flows issue you can jump in without drowning

Desmond Lachman (Letters, Ft.com March 3) is right to take Dani Rodrik and Arvind Subramanian to task for their advocacy of capital controls ("Why we need to curb global flows of capital", Comment, February 26). There is evidence that controls undercut efficiency by insulating domestic companies from competitive forces and make it difficult for small companies to raise capital.

Professor Rodrik and Dr. Subramanian are also wrong to claim that foreign capital confers no benefits. A comprehensive International Monetary Fund study last year (http://www.imf.org/external/np/res/docs/2007/0607.htm) found that foreign direct investment and other non-debt capital flows boost economic growth without adverse side-effects on economic volatility. Capital flows may also confer collateral benefits of raising economic efficiency, developing the domestic financial sector, and disciplining macroeconomic policies.

The IMF study did confirm that countries should be cautious about opening up to global flows when financial sector development and institutional quality are below key thresholds. In other words, don't jump into the water unless you can swim. But a cautious opening up can spur the very institutional development needed to benefit from foreign capital.

Encouragingly, these are also the lessons many policymakers have drawn from the cross-country experience with capital flows: few will heed Prof Rodrik and Dr. Subramanian's recommendation that one should never learn to swim for fear that one may drown.

The authors are Economic Counselor and Director and Deputy Director, respectively, in the IMF's Research Department.