Partial Capital Account Convertability

I've read all but last 30 pages of the Paul Krugman's book. This has been an enlightening book on economics. I refrain from hyperbole because I read so little, its tough to compare with other books.

This has also been a journey of discovery. I have come to appreciate India's stand on partial capital account convertability. Its been demonstrated time and again, how assets bubbles are created through foreign investments and how a country could face financial crisis owing to no fault of theirs but only because of speculators, sentiment and lack of depth of their own financial markets.

I have now started believing that unless a country has enough depth in its own financial markets, it should not let free inflow and outflow of capital. The sheer volume and speed of the flow and cause bubbles or busts (depending on which way the flow goes).

The reason India remained relatively unaffected by Asian crisis, and to some extent US meltdown is because of these curbs, regulations and checks. I now see the wisdom of it. A country needs to manage its transition to prosperity on its own terms. India is doing it, and so is China. Chinese Yuan used to quote @8.25 in early 2005 and around the time I visited Shanghai. Today its quoting @6.8. Its about 16% gain in 4 years. Its gradual, managed and thats how it should be done.