The IMF’s long-awaited guidance note on capital flows failed to remedy the faults of the ‘institutional view’ on capital account. The World Bank’s long-term thinking also emphasises liberalisation.
The IMF published its guidance note in late April, providing advice for how staff should interpret the institutional view on capital account policies which the Fund’s board agreed in November 2012 (see Update 83). While conceding that “staff advice should not presume that full liberalisation is an appropriate goal for all countries at all times”, the note put a high bar on using capital account regulations to help with inflow surges: “Capital flows generally warrant adjustments in macroeconomic variables, including the real exchange rate, and policies need to facilitate these adjustments.” It made allowance for “a temporary re-imposition of [capital flow measures] under certain circumstances” – a combination of an overvalued exchange rate, a high growth rate and a high levels of foreign exchange reserves – but emphasised that they “should be transparent, targeted, temporary, and preferably non-discriminatory.” The note argues that these measures can be considered “consistent with an overall strategy of capital flow liberalisation.”
Addressing the measures source countries should take (see Update 82), the note said “staff should discuss with source countries, where relevant for surveillance, the role of the latter’s policies in influencing capital flows to the rest of the world and ways to internalise the spillovers of such policies (such as whether alternative policies are feasible that have fewer spillovers). Staff analysis should also seek to cover official flows related to reserve accumulation by central banks and foreign asset purchases by governments, including sovereign wealth funds.” While destination countries are expected to ignore domestic priorities to adapt to international capital flows, source countries “would not be expected to adopt policies that are less effective in meeting primary domestic objectives, such as stability,” with the note saying “in discussions it is useful for staff to examine with authorities possible options to reduce policies’ outward spillovers while maintaining effectiveness”.
World Bank in on the action
In mid May the World Bank released a Capital for the future report that looked at “key economic and structural drivers that, together with demographic shifts, will affect saving and investment decisions over the next two decades – and thus the global distribution of capital in the future.” The report outlined two possible scenarios – one of slower convergence between developing and developed countries and one of faster convergence. However, it is built on the Bank’s assumptions that financial deepening will bring growth (see Update 82), and that private investment will channel itself into infrastructure (see Update 86).
The report identified “the most dominant trend in international finance in the coming decades: the increase in gross capital flows and the role of developing countries in that process.” Contrary to private sector fears of global financial fragmentation (see Update 85), it predicted the “third age of financial globalisation, when developing economies will become much more deeply integrated into the fabric of global finance and will account for a growing share of the world’s gross capital inflows and outflows.” According to the report, “China is expected to account for over 40 per cent of global outflows in 2030.”
Like the IMF, the Bank report went on to cheerlead for liberalisation, arguing that “there is potential danger for policy makers to err on the side of overly strict capital controls, choking off access to finance, when what is really needed is careful reform of regulatory institutions and greater international regulatory coordination.” The report also argued that multilateral institutions are a key place for policy coordination about the international monetary system, which “is key for its stability”. However the report makes no mention of proposals for greater regional cooperation (see Update 79).
A paper by Deborah Siegel, a former senior legal counsel at the IMF in a March report by Boston University’s Pardee Center explains that the IMF could at any time require a member to impose capital controls as a condition of receiving financial assistance, though admits it has never done this. The paper discusses the compatibility of this provision with a number of free trade agreements (FTAs) being negotiated, such as the Trans Pacific Partnership. Siegel writes “the absence of a [balance of payments] safeguard in FTAs could also interfere with a member receiving IMF financing. A member could be rendered ineligible to use IMF resources if, in the context of an IMF-supported program, its FTA obligations dissuaded it from imposing controls requested by the IMF due to a large and sustained outflow of capital (even though the IMF has not to date made such a request).” Siegel argues that the IMF’s multilateral perspective should take preference and that “bilateral and regional trade/investment agreements should contain safeguards for situations of economic crises. These clauses can be designed to balance the liberalisation undertakings of the treaties with policy space to manage volatility and other vulnerabilities, including those based on the potential advice of the IMF.”