PHM-Exch> The IMF's welcome rethink on capital controls

[Claudio Schuftan]

From: David Legge <D.Legge at latrobe.edu.au>


 *The Guardian*<http://www.guardian.co.uk/commentisfree/cifamerica/2011/apr/06/imf-capital-controls>published
the following opinion article by Kevin P. Gallagher and José
Antonio Ocampo yesterday, 06 April:

The IMF's welcome rethink on capital controls
During the global recession, many developing countries found capital
controls a vital policy tool - a fact the IMF now recognises

*Kevin Gallagher and José Antonio Ocampo*
 guardian.co.uk
Wednesday 6 April 2011 22.00 BST

In contrast to most western governments, over the past two years, the
International Monetary Fund (IMF) has boldly conducted one of the most
honest self-assessments of its actions leading up to the financial crisis,
has become somewhat critical of
inflation-targeting<http://www.imf.org/external/pubs/ft/survey/so/2010/int021210a.htm>and
has endorsed the use of capital controls. In March of this year, the
IMF
held a full conference<http://www.imf.org/external/np/seminars/eng/2011/hlcfin/index.htm>on
rethinking macroeconomics where its organisers concluded that the
crisis
has shattered the economic orthodoxy behind the fund's previous policies.

In preparation for its annual meetings next week, on Tuesday the IMF took
its work on capital controls a step further by issuing two
reports<http://www.imf.org/external/pubs/ft/survey/so/2011/NEW040511B.htm>(one
official report and one staff discussion paper) outlining when nations
should use capital controls, and what types of capital controls should be
used under the proper circumstances. The new reports amount to yet another
big step forward for the IMF – though there is still a long way to go.

In February 2010 the IMF
changed<http://www.imf.org/external/pubs/ft/survey/so/2010/POL021910A.htm>its
stance on capital controls because IMF economists' own analyses found
that, over and again, when developing countries used capital controls, they
worked. Indeed, the IMF found that those nations that used capital controls
were among the least hard-hit during the crisis.

In a nutshell, the newest IMF report on controls does three things. First,
it shows how post crisis capital flows to developing nations have been
dominated by volatile portfolio flows and have therefore been destabilising,
and that some nations resorted to capital controls to cope with those flows,
with some success. Second, it importantly proposes a new nomenclature for
capital controls, referring to them as capital flow management measures
(CFMs). Third, it puts forth a set of guidelines for when nations should
(and should not) deploy such measures and what form CFMs should take.

The first two components of the report are landmark for the IMF. The IMF has
now recognised that capital flows can be destabilising – causing currency
appreciation, asset bubbles and volatility – for developing countries. Their
analysis of the recent use and modest success of controls by nations like
Brazil confirms a preliminary analysis by one of us published last month
where Kevin Gallagher
found<http://www.ase.tufts.edu/gdae/policy_research/KGCapControlsPERIFeb11.html>that
controls in Brazil and Taiwan were associated with a reduction in the
pace of currency appreciation and with helping those nations achieve a more
independent monetary policy.

Where the report is lacking is in the IMF's determination of the efficacy of
CFMs and what types should be used. The report recommends that CFMs be used
as a last resort and as a temporary measure, and only after a nation has
accumulated sufficient reserves, tinkered with interest rates and let its
currency appreciate. When measures are used, the IMF suggests that CFMs not
discriminate against the residency of a capital flow.

This has not been
well-received<http://www.bloomberg.com/news/2011-04-05/imf-capital-control-proposal-marks-shift-as-brazil-holds-out-with-minority.html>in
developing world. Without the advice of the IMF, many nations have
deployed CFMs, both discriminatory and nondiscriminatory, alongside a host
of other macroeconomic and macro-prudential policies as they have seen
appropriate. And according to the IMF's own research, CFMs have been a
success – even though they have sometimes not met those guidelines.

Interestingly, the accompanying IMF staff discussion
paper<http://www.imf.org/external/pubs/cat/longres.aspx?sk=24505.0>is
somewhat less strident, saying: "there is no unambiguous welfare
ranking
of policy instruments (though nondiscriminatory prudential measures are
always appropriate), and a pragmatic approach taking account of the
economy's most pertinent risks and distortions needs to be adopted."

What is also disappointing from the report is what is not there. Even more
importantly for setting guidelines for the use of CFMs, the IMF should focus
at least equally on helping nations enforce such measures when they deem
them appropriate. Many CFMs only work partially and for a short time because
controls are evaded by foreign investors. Designing a regime to help nations
enforce CFMs would be a welcome addition to the global financial system.
Particularly important in this regard is to undo the de facto regime
consisting of a tangled web of trade treaties that outlaw many CFMs.


The IMF is to be applauded for taking another step towards a more
integrative and development-friendly approach to global finance. It still
has a way to go.
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