<br>From: <b class="gmail_sendername">David Legge</b> <span dir="ltr"><<a href="mailto:D.Legge@latrobe.edu.au">D.Legge@latrobe.edu.au</a>></span><br><div class="gmail_quote"><div bgcolor="#ffffff"><div style="font-family: Tahoma; direction: ltr; color: rgb(0, 0, 0); ">
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<div><a href="http://www.guardian.co.uk/commentisfree/cifamerica/2011/apr/06/imf-capital-controls" target="_blank" style="font-size: x-small; "><i>The Guardian</i></a><font class="Apple-style-span" size="1"> published the following opinion article by Kevin P. Gallagher and José Antonio Ocampo yesterday, 06 April:
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<p style="font-size: x-small; "><span style="font-family:'Georgia','serif';color:rgb(51,51,51);font-size:19.5pt">The IMF's welcome rethink on capital controls</span><span style="line-height:115%;color:rgb(102,102,102);font-size:12pt"><br>
During the global recession, many developing countries found capital controls a vital policy tool - a fact the IMF now recognises</span></p>
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<div style="font-size: x-small; "><b><font color="#000000"><span style="line-height:115%;font-size:12pt">Kevin Gallagher and Jo</span>sé Antonio Ocampo</font></b><span style="line-height:115%;font-size:12pt"></span><br>
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<font class="Apple-style-span" size="3"><span style="line-height: 115%; font-size: 12pt; line-height: 115%;"></span></font><span style="line-height: 115%; font-size: 12pt; "><a href="http://guardian.co.uk" target="_blank">guardian.co.uk</a></span><br>
<span style="line-height: 115%; font-size: 12pt; ">Wednesday 6 April 2011 22.00 BST</span><br>
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<span style="line-height: 115%; font-size: 12pt; ">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 <a href="http://www.imf.org/external/pubs/ft/survey/so/2010/int021210a.htm" target="_blank">
inflation-targeting</a> and has endorsed the use of capital controls. In March of this year, the
<a href="http://www.imf.org/external/np/seminars/eng/2011/hlcfin/index.htm" target="_blank">
IMF held a full conference</a> on rethinking macroeconomics where its organisers concluded that the crisis has shattered the economic orthodoxy behind the fund's previous policies.
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<font class="Apple-style-span" size="3"><span style="line-height: 115%; font-size: 12pt; line-height: 115%;"></span></font><br>
<font class="Apple-style-span" size="3"><span style="line-height: 115%; font-size: 12pt; line-height: 115%;"></span></font><span style="line-height: 115%; font-size: 12pt; ">In preparation for its annual meetings next week, on Tuesday the IMF took its work on capital controls a step further by
<a href="http://www.imf.org/external/pubs/ft/survey/so/2011/NEW040511B.htm" target="_blank">
issuing two reports</a> (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. </span><br>
<font class="Apple-style-span" size="3"><span style="line-height: 115%; font-size: 12pt; line-height: 115%;"></span></font><br>
<span style="line-height: 115%; font-size: 12pt; ">In <a href="http://www.imf.org/external/pubs/ft/survey/so/2010/POL021910A.htm" target="_blank">
February 2010 the IMF changed</a> 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.</span><br>
<font class="Apple-style-span" size="3"><span style="line-height: 115%; font-size: 12pt; line-height: 115%;"></span></font><br>
<span style="line-height: 115%; font-size: 12pt; ">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.</span><br>
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<span style="line-height: 115%; font-size: 12pt; ">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
<a href="http://www.ase.tufts.edu/gdae/policy_research/KGCapControlsPERIFeb11.html" target="_blank">
preliminary analysis by one of us published last month where Kevin Gallagher found</a> 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.</span><br>
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<span style="line-height: 115%; font-size: 12pt; ">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.</span><br>
<font class="Apple-style-span" size="3"><span style="line-height: 115%; font-size: 12pt; line-height: 115%;"></span></font><br>
<span style="line-height: 115%; font-size: 12pt; "><a href="http://www.bloomberg.com/news/2011-04-05/imf-capital-control-proposal-marks-shift-as-brazil-holds-out-with-minority.html" target="_blank">This has not been well-received</a> 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.</span><br>
<font class="Apple-style-span" size="3"><span style="line-height: 115%; font-size: 12pt; line-height: 115%;"></span></font><br>
<span style="line-height: 115%; font-size: 12pt; ">Interestingly, the accompanying <a href="http://www.imf.org/external/pubs/cat/longres.aspx?sk=24505.0" target="_blank">
IMF staff discussion paper</a> 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."</span><br>
<font class="Apple-style-span" size="3"><span style="line-height: 115%; font-size: 12pt; line-height: 115%;"></span></font><br>
<span style="line-height: 115%; font-size: 12pt; ">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.</span><br>
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<span style="line-height: 115%; font-size: 12pt; ">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.</span><br>
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