The G20 released conclusions on how countries should manage capital flows, while papers suggest the IMF’s slow move to acceptance of national regulations on international capital flows continues.
In October, G20 finance ministers issued a paper on Coherent conclusions for the management of capital flows. This confirmed the step-back from the IMF’s attempt to develop a ‘code of conduct’ for capital controls (see Update 76). Instead, they emphasised that “there is no one-size-fits-all approach or rigid definition of conditions for the use of capital flow management measures.” While saying that measures should be “targeted to specific risks”, “regularly reviewed”, and “adapted or reversed as destabilising pressures abate”, they cautiously support the increasing use of capital controls and other capital account management policies by G20 and other countries.
The IMF’s previous position that such controls should be used as a last resort (see Update 75) appears to be losing traction. The Fund recognised as much in its September Multilateral surveillance report, which says that “capital flow management tools are useful for changing the composition of capital inflows.” This follows the line of an August IMF staff discussion note, The effectiveness of capital controls and prudential policies in managing large inflows, which argues that “for reasons that are not yet fully understood, capital controls and related prudential measures achieve their stated objectives in some cases but not in others.”
However, the discussion note focuses on “countries that have already liberalised many types of international capital flows”, not countries such as China and India, which have “comprehensive systems” that “allow for close monitoring of flows and a calibrated tightening of controls when needed.” Even so, the discussion note finds that “controls are more effective in countries [such as China and India] that more heavily control capital flows”, but does not reflect on the implications of this, or whether such controls have contributed to the marked economic success of these countries in recent decades.
Instead, the paper concludes that: “capital controls lose their effectiveness over time, as markets find ways to circumvent them”; that while controls can “change the composition of inflows” to encourage longer term flows, they “have little effect on overall flows” and “in most cases, controls also have little effect on currency appreciation.” The paper finishes by calling for more research, and better understanding of the impacts of different types of controls.
Roberto Frenkel, director of Argentinian NGO CEDES, speaking at a May conference on managing capital flows co-organised by the IMF and the Brazilian government gave an alternative perspective: “The main reason why I think [capital control] policies should be implemented is because of the effects that capital inflows have on the real exchange rate, which represent a threat [to] economic activity, employment and more generally on the economic development of these countries.”
Meanwhile, in November, Stephany Griffith-Jones and José Antonio Ocampo, both of Columbia University and Kevin Gallagher of Boston University, released an issues paper calling for an alternative approach. It summarises the discussions of an independent task force on capital flows management that also included former Reserve Bank of India deputy governor Rakesh Mohan. They argue that IMF “prescriptions fall short of being sound advice for many developing countries” and instead capital account regulations “should be seen as an essential part of the macroeconomic policy toolkit and not as mere measures of last resort.” They propose a set of guidelines for the use of such regulations, and call for the IMF and other global bodies to “make a stronger effort to reduce the stigma attached to capital account regulations and protect the ability of nations to deploy capital account regulations to prevent and mitigate crises.”