As emerging market economies expand tools to actively manage international financial flows to cope with surges, a liberalisation reform of the IMF’s statutes is up for debate again.
In mid December, South Korea introduced a new tax on foreign currency borrowing. In January, Brazil adopted new reserve requirements on domestic banks foreign exchange positions, and even Chile’s central bank – otherwise known for its hands-off approach to its floating exchange rate – intervened in the foreign currency market. While South Korea mainly aims to protect its banking system from currency risks, Brazil and Chile are trying to contain the pressure of strongly appreciating exchange rates that make it hard for their exporters to compete in international markets.
In a mid January briefing, Curbing hot capital flows to protect the real economy, Stephany Griffith-Jones of Columbia University and Kevin Gallagher of Boston University point to the important role of rich countries for regulating global capital flows. Because controls may shift financial flows to nations that do not deploy them, “the US could introduce measures to discourage carry trade flows to the rest of the world, and especially to developing countries. This could be done by taxing such flows.”
Heated IMF mandate debates
The IMF board discussed a long-awaited policy paper (see Update 73, 72) on The Fund’s role regarding cross-border capital flows in mid December. The executive directors noted that “volatile capital flows played a key role in the recent crisis”. While directors agreed that there is a “need to strengthen the Fund’s role regarding international capital flows” in line with the Fund’s surveillance mandate, they stressed that “substantial analytical work is needed to develop a coherent Fund view and inform policy guidance on capital flows”. The outcome of this analysis will then influence the Fund’s future bilateral and multilateral surveillance, which will be discussed by the board later this year.
Bilaterally, the board paper suggests that the Fund should “issue principles for the guidance of members on the appropriate design of policies to deal with international capital movements”, including “to provide clarity and a methodological framework for determining the nature and scope of … ‘capital controls'”. Multilaterally, the board paper advises the Fund to play a bigger role “assessing cross-country spillovers from capital account policies”. The IMF’s triannual surveillance review and the review of the 2007 decision on bilateral surveillance will be held later this year and will consider these options.
Strong disagreement was expressed by the board over the idea of amending the IMF statutes to “give the Fund jurisdiction over capital controls”, a demand that its management enthusiastically called for in the mid 1990s (see Update 11). A “liberalisation-centric approach”, as rejected by the board more than a decade ago, was proposed as one option in the December board paper. It would “establish specific obligations for members to liberalise capital movements, subject to strong safeguards that would allow for the phased elimination of restrictions, the routine exclusion or approval of measures imposed for prudential reasons, and the temporary approval of restrictions imposed for balance of payments and macroeconomic stability purposes.” An alternative, “more neutral approach …would give the Fund the authority to require a member to either eliminate or impose restrictions”, depending on what the Fund considered appropriate.
Another discussion of the Fund’s role regarding capital flows is now planned for the summer, after IMF staff do the requested analytical work.
Alexander Cobham from London-based NGO Christian Aid said “this beggars belief that the institution which pushed liberalisation so hard, while the evidence accumulated of the complete inappropriateness of this policy prescription, is now repositioning itself to take ‘jurisdiction over capital controls’. If any institution has shown itself unworthy to be trusted to take evidence-based decisions, rather than ideological ones in this important policy area, it is the Fund.”
G20 supporting liberalisation?
In late January, more than 250 economists sent a letter to the US government expressing concern “regarding the extent to which capital controls are restricted in US trade and investment treaties”. The letter states that “given the severity of the global financial crisis and its aftermath, nations will need all the possible tools at their disposal to prevent and mitigate financial crises. … New research points to an emerging consensus that capital management techniques should be included among the ‘carefully designed macro-prudential measures’ supported by G-20 leaders at the Seoul Summit.”
However, the G20 position on the issue could be extremely controversial. French president Nicolas Sarkozy, who chairs the G20 in 2011, set out his agenda in late January, with the international monetary system as one of six priorities (see Update 74). The English version of the agenda, which includes the issue of capital controls, states that “a way must also be found to limit the negative consequences for the global economy of excessive volatility in certain currencies and excessive rigidity in others.” In contrast, the French Dossier de Presse given out to journalists translates to “The IMF should have a mandate over capital accounts that it currently does not hold. That could take the shape of multilateral rules supporting the free movement of capital, but allowing for state intervention in cases of massive changes in flows.”