While the IMF-supported bank restructuring in Cyprus (see Update 85, comment) includes a strict set of restrictions on capital movements, the World Bank and IMF are failing to embrace a more pragmatic approach to capital account regulation.
Management consultancy McKinsey’s March report, Financial globalization: Retreat or reset, agonised over a slowdown in global capital flows and recent moves by some middle-income countries to exert greater control over capital movements. It presented two possible scenarios: “One path leads to a more balkanised structure that relies primarily on domestic capital formation and concentrates risks within local banking systems, while another points toward a healthier model of financial globalisation that corrects the pre-crisis excesses while supporting more robust economic growth.”
The report failed to consider the likely emergence of a third option, a return to unsustainable and volatile flows which are in the interests of financial market actors. Commenting on the report, Jayati Ghosh of Jawaharlal Nehru University in India, argued that the slowdown in flows was a good thing. “it is more important than ever to restrain finance, since that task is clearly incomplete. To make the financial system fulfil the basic tasks for which it is supposed to exist – to direct savings to productive investment in a stable and socially desirable way – it is essential to shrink it further.”
the only way to start regaining some control over finance is to put the genie of global finance back into the bottle
Cyprus’s capital outflow regulations include limits on withdrawals from banks, the volume of euros allowed to be transferred overseas, and international credit and debit card transactions. These types of capital account regulations are forbidden by the Lisbon Treaty of the European Union, but Cyprus has been given permission by the EU to introduce so-called administrative measures, which the EU says are “appropriate in view of the present unique and exceptional situation of Cyprus’ financial sector”.
While emergency outflow restrictions have been a part of the IMF crisis resolution toolkit, albeit sparingly used, the Fund has proved much warier of regulations on capital inflows being used by middle-income countries (see Update 83, 81).
A mid March article from academics Kevin Gallagher and José Antonio Ocampo argued that the IMF’s new ‘institutional view’ on capital account regulations (see Update 83), “scrutinises the exact types of capital account regulations in emerging markets”, but “it does not equally examine which types of monetary and regulatory policy trigger the most risky capital flows from developed to developing countries”. Gallagher and Ocampo argued that “the conditions under which [the IMF] will advise nations to regulate capital flows may be too narrow. It is too early to tell if the IMF has simply changed the tune but playing the same song. All eyes will be monitoring the application of the new institutional view.”
The World Bank appears to share the IMF’s disquiet. Speaking on the sidelines of the Inter-American Development Bank meetings In early March, World Bank regional vice president Hasan Tuluy indicated that the kinds of capital account regulations adopted by Brazil, which were found to be effective (see Update 82), have been disruptive: “Protectionism is a very blunt instrument. Having complicated capital controls may be attractive right now, but cannot be sustained in the long term.”
In contrast, Antonio Tricarico from Italian NGO Re:Common said: “The cases of Iceland and Cyprus show us that the only way to start regaining some control over finance is to put the genie of global finance back into the bottle. Reintroducing permanent regulation over international movements of capital is the way to subordinate finance to industrial policies and the long overdue transformation of our societies toward a low-carbon and more just economy, both in the North and the South.”