Control That Capital

It is time for the IMF and the United States to fully support capital controls, an easy way to help ease crises in developing economies.

BY KEVIN P. GALLAGHER | MARCH 29, 2010

In a new study, staff members of the International Monetary Fund (IMF) endorse an idea to help mitigate the impact of economic crises in developing countries: capital controls. Before the 1997 Asian economic crisis, IMF staff thought controls -- really a macroeconomic policy to smooth the amount of money coming into and leaving an economy -- should be banned. Now, and particularly since the Great Recession, the IMF has changed its tune. Capital controls are a good idea -- and now is the time for the IMF and the United States to back them.

Capital flows -- basically, investment from one country into another -- can help developing countries grow. Many developing economies lack the savings and financial institutions to help finance and kick-start business activity. Money and investment from abroad can help fill that gap.

The more capital coming in, the more the developing country benefits, one would think. But it is a bit more complicated than that. Cross-border capital flows tend to be "pro-cyclical": too much money comes in when times are good, and too much money evaporates during a downturn. In the run-up to the 2007-2008 crisis, for instance, wealthy countries poured too much money, too fast, into developing economies. This led to asset bubbles in real estate and stock prices, as well as currency appreciation. When the crisis hit, investors yanked their funds and retreated to the "safe" haven of the United States.

Capital controls help smooth the inflows and outflows of capital and protect developing economies. Most controls target highly short-term capital flows, usually conducted for speculation rather than longer-term investment. For instance, before the crisis hit, Colombia required that a certain percentage of short-term capital be parked in the central bank for a year. And last November, Brazil put a 2 percent tax on speculative inflows.

The new IMF study finds that such capital controls helped buffer against some of the worst effects of the financial crisis in some developing countries, such as Colombia, Brazil, India, Thailand, and China. It thus endorses capital controls as part of the macroeconomic policy tool kit.

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Kevin P. Gallagher, associate professor of international relations at Boston University, is co-author of "Capital Controls and 21st Century Financial Crises: Evidence from Colombia and Thailand" and author of the forthcoming U.N. report, "Losing Control: Policy Space to Prevent and Mitigate Financial Crises in Trade and Investment Treaties."

RALF.LEITERITZ

3:28 PM ET

March 30, 2010

IMF thinking on capital controls

I would like to urge the author to re-read the IMF study he cites in his article. Rather than endorsing capital controls across the board as he would like us to believe, the authors of the IMF study consider temporary controls on capital inflows as the "ultima ratio" after all other macroeconomic policy instruments have been exhausted. This is a far cry from endorsing capital controls and the "sea change" that the author attributes to the current IMF thinking.

In fact, the case can be made that the IMF's view on capital controls follows an evolutionary trend with the Asian financial crisis in 1998 as the crucial turning point toward guarded tolerance for Chile-style controls on short-term capital inflows. Overall, the Fund continues to support free capital mobility as a desireable goal of macroeconomic management for all countries. What has changed over the last 10-12 years, though, are its views on the speed and sequencing towards reaching that goal. It has no doubt become more tolerant of temporary controls of short-term capital inflows. Yet to stipulate that the Fund is now endorsing capital controls across the board is a gross misrepresentation of its public statements. For the large majority of restrictions on international capital movements you simply won't get the Fund on board for the foreseeable future.

 

ALLYSIAENACHE

3:52 PM ET

April 21, 2010

IMF= I am fired. Satire or

IMF= I am fired. Satire or mean a little bitter feeling. IMF should do some thing to control the funds flow, only the Positive funds should be supported, the others should be controlled. girl games