Sponsors: Bretton Woods Project, Latindadd

Chair: Sarah Anderson (Global Economy Project Director, Institute for Policy Studies)

Panelists: Peter Chowla (Coordinator, Bretton Woods Project), Maria Jose Romero (Policy and Advocacy Officer, Latindadd), Kevin Gallagher (Associate Professor, Boston University)

Discussant: Vivek Arora (Assistant Director in the IMF’s Strategy, Policy and Review Department)

In the wake of the financial collapse of 2008, the role of cross-border capital flows, which can have both good and potentially devastating consequences, is again being questioned. The countries that fared the worst in the crisis were those with the most deregulated and liberalised policies towards capital inflows. Three new reports set the stage for new thinking on regulating financial flows across borders, looking towards pragmatic responses that enable developing countries to have policies for growth without facing the risks and instability that these financial flows can generate.

Presentations

Kevin Gallagher, Boston University

• See the conclusions of the Boston University report: Regulating Global Capital Flows for Long-Run Development
• Key ideas:
  • Need to regulate cross-border finance, not just national financial systems
  • we have an laternative code of conduct on how to do this
  • Currently the burden is on recipients, but we need regulation on both ends, so sourtce countries need to participate
  • must review trade & investment agreements – ie Brazil has flexibility because no trade agreements that restrict their policy space
  • We need a global review of the policy environment that restricts countries from implementing capital account regulations
• Alternative code of conduct
  • Own IMF research says “last resort” not good enough – capital acocunt regulations must be part of a package
  • we need permanent laws to enable the use of these tools
  • By default we are going to be discriminating between residents/non-residents because of their differential demand for cross-border payments, so lets not worry about this “discrimination

Maria José Romero, Latindadd

• See the conclusions of Latindadd/Bretton Woods Project report: Breaking the Mould
• Brazil – Effective and dynamic use of regulations enabled some breathing space and lower appreciation
• Argentina – Regulations were part of an overall macro-economic policy package; still problems with inflation and capital flight; there are problems with the use of tax havens
• Costa Rica – too soon to tell what will happen in Costa Rica

Peter Chowla, Bretton Woods Project

• The seminar presentation is available as a PDF.

Vivek Arora, Strategy and Policy Review Department, IMF

• There are 4 streams of our work – role of the IMF, capital account liberalization, management of inflows, source countries
• Role of the IMF
  • the IMF has no clear mandate on capital accounts
  • there is no proposal to impose obligations on countries; though countries’ national trade and investment agreement don’t contravene the IMF Articles of Agreement
  • IMF has a responsibility for macro-stability, so it must have a view – we want some consistency rather than ad hoc views, this is why the IMFC called for a “comprehensive, balanced & flexible institutional view”
• Capital account liberalisation
  • there are benefits but also threshold effects – ie you must have sufficiently deep financial sectors to benefit
  • openness matters to financial deepening
  • But we recognise that there are costs; At the end of the day there is no presumption that full liberalisation is the goal for all countries at all times
  • We dont have a prescriptive view, there is scope for outflows controls if there are crises
  • However countries with controls currently could benefit from liberalisation – eg CHina is liberalisating outflows to help deal with excess liquidity and reserves buildup domestically
• Managing inflows
  • inflows have picked up because of fundamentals and interest rate differentials
  • There have been huge swings in liquidity – witness Hong Kong
  • There are heterdox ways of dealing with this: some have done capital flows measures, some build up reserves, some allow appreciation, some pursue greater liberalisation of outflows – the toolkit is very broad
  • There is no hierachy of measures, and we do not think of capital flows measures as coming in sequence – it is about the policy mix of measures
  • capital flow measures can not be a substitute for adjustment, but can provide breathing space for adjustment
• Out flow measures can be useful in crisis time (ie. Malaysia), but when pressure abates you should remove them
• Source country policies
  • we reciognise we need to do more; must handle inflows and outflows – there are failures in supervision and regulation
  • monetary policy in advanced economies – we are still working on this question, there are no firm conclusions yet
  • but regulatory failure is clearly a problem
• IMF views are still evolving

Discussion

Massimo Buonomo – with Brazil a big problem is tax havens as well; the appreciation of the real is not having a strong effect on exports; there is an assymetry in the price adjustment of foreign goods

Aldo Caliari – there is a contradiction between the IMF’s macro-stability mandate and its taking a hands-off approach to trade agreements that might stop the use of capital account regulations; would the Fund ever advise against trade agreements that constrain capital account regulation?

Jesse Griffiths – in this political context, the IMF seems to be very slow to change; governments that don’t control capital flows are going to get themselves into trouble; we need stronger crisis prevention

Peter Chowla – Brazil’s exports are shifting increasingly towards commodities and extractives – this explains strong export performance; this is a real problem because it presents risks when commodity prices fall leaving low industrial capacity

Vivek Arora:

• This is a good point on trade agreements
• In principle there is a role for all countries to have capital account regulations
• However China and India are moving forwardf with liberalisation – see the Rajan report, the PBOC report
  • The caution is only on the pace and the end point
• Countries can deal with crises without capital account regulations too, so I wouldn’t criticise those that don’t use them

Maria José – in Latin America there is a lot of regional discussion and worries, but actions are slow; tax havens is also on the agenda for regional cooperation and coordination

Kevin Gallagher:

• I think the IMF is incredibly fast in terms of changing its stance on this issue – complete turnaround since 2009
• IMF staff and developing country governments are ahead of the IMF board and rich countries – the code of conduct was approved last year by a weighted majority
• Great that the staff view has changed away from a “hierarchy” of measures
• trade treaties are still a big problem – Chinle had to use reserve accumulation in the crisis because of its trade treaties; it is institutionally inconsistent to ignore the role of these treaties when the IMF comes to a view
• Sean Hagan’s paper on the legal implications of CARs was very helpful