Question

Explain why converging economies may present a strong argument for limiting flows of capital but not for limiting trade.

Short answer

1

Step-by-step solution

Step 1. Define converging economy.

The downward spiral of all relatively high economies to the status of lower-income countries is referred to as a converging economy.

Step 2. Explain why converging economies may provide a compelling case for restricting capital flows but not for restricting trade.

Converging economies are a wonderful example of how countries that participate in global commerce can advance economically and socially. As a result, they can catch up to their more developed trading partners.

However, as the recession in East Asian Tiger countries has shown, if international inflows of capital are not adequately handled by local financial institutions, or if they are used for speculative purposes by lending to borrowers with questionable creditworthiness, non-performing assets can arise. This could lead to a decrease in aggregate demand and, ultimately, a recession.