A report by the IMF’s Independent Evaluation Office (IEO) released in May concludes that the Fund’s “cheerleading” on capital account liberalisation in the early 90s was unbalanced and inconsistent. However, the parameters of the evaluation precluded addressing whether or not liberal capital accounts are beneficial or whether the Fund’s articles of agreement should be amended to give it an explicit mandate on capital account issues.
The authors assert that “in none of the programme cases did the IMF require capital account liberalisation as formal conditionality”. Instead, they said, the process was driven by “authorities’ own economic and political agendas, including OECD or EU accession and commitments under bilateral or regional trade agreements”. The report’s authors do not completely exonerate the Fund. While IMF management, staff and board were “aware of the risks of premature capital account liberalisation”, such awareness “remained at the conceptual level” and did not lead to operational advice on preconditions, pace and sequencing of parallel reforms “until later in the 1990s”. Moreover, when advice was given, it was inconsistent. Sequencing of policy reforms needed prior to capital account liberalisation was “mentioned in some countries but not in others”; advice on managing capital inflows “differed across countries and time”; and on the use of capital controls “a range of views were expressed”.
According to the evaluation, IMF staff was opposed to the use of capital controls. After their use in Chile and Malaysia to the consternation of Fund staff, the institution became “more accommodating of [their] use”. Chile taxed inflows of short-term money by requiring foreign investors to deposit a portion of their investments in non-interest bearing accounts for one year. Malaysia used capital controls temporarily in an attempt to slow the outflow of foreign investment in the wake of the east asian crisis in 1997-8.
IMF management, staff and board were aware of the risks of premature capital account liberalisation
The Fund comes in for criticism for its failure to make any progress in reducing the boom-bust nature of capital movements through the use of regulatory measures targeted at investors in rich countries. The focus of policy advice “remains on the recipient countries”. This is one of the key points raised by Washington Post columnist Paul Blustein in his new book on the Argentine crisis, And the money kept rolling in (and out). Blustein points to incentives which push supposedly independent investment analysts to oversell emerging market investments and downplay the risk of default – Wall Street firms’ profitability depends heavily on winning investment banking fees.
This point is the basis for one of the two major recommendations of the IEO evaluation. The authors argue that the Fund could provide more input into rich countries’ financial supervision to reduce “herd behaviour”. The second recommendation is for greater clarity on the Fund’s approach to capital account issues. Simply spelling out the risks of capital account liberalisation is inadequate; the evaluation calls on the Fund to assist authorities “when and how to open the capital account”, and provide a “gauge of the benefits, costs and risks”.
The failure to address the question of whether the authorities should open the capital account at all suggests however that the evaluation’s authors have already made up their minds about the question of “whether liberal capital accounts are intrinsically beneficial”.