When French President Nicolas Sarkozy took the reins as host of this year’s G20 summit, which is being held in Cannes yesterday and today, he called on the IMF to develop an enforceable “code of conduct” for the use of capital controls — or capital-account regulations, as we prefer to call them — in the world economy. The IMF followed through by publishing a preliminary set of guidelines in April.
Regulation of cross-border capital flows has been strangely absent from the G20’s agenda, which is aimed at strengthening financial regulation. However, they are a central element in the financial volatility that incited calls for stronger regulation in the first place. The IMF has shown that those countries that deployed capital-account regulations were among the least hard-hit during the worst of the global financial crisis. Since 2009, it has accepted and even recommended that such regulations are useful to manage the massive inflows of “hot money” into emerging markets.
That said, while the IMF’s proposed code is a step in the right direction, it is misguided. So, the G20’s endorsement of the fund’s guidelines would not be wise for a world economy trying to recover from one financial crisis while preventing the next one.
With low interest rates and a slow recovery in the developed countries, accompanied by high interest rates and rapid growth in emerging markets, the world’s investors flocked from the former to the latter: Taiwan, Brazil, Chile, South Korea and others. Then, in recent months, they flocked out of those emerging countries, showing once again how volatile and dangerous such flows are.
Indeed, as the IMF has pointed out in its World Economic Outlook, these flows threaten to inflate asset bubbles, make it harder for countries to pursue an independent monetary policy, and trigger currency appreciation and associated losses in export competitiveness. Brazil’s currency, for instance, appreciated more than 40 percent from 2009 until August, before weakening in recent months.
Some countries responded by doing nothing, but many, including industrialized countries like Japan and Switzerland, intervened heavily in currency markets. Some resorted to capital-account regulations on inflows, such as taxes on the foreign purchases of bonds, equities and derivatives, reserve requirements on short-term inflows and so forth.
Brazil’s finance minister referred to these numerous actions as the “currency wars.” This is where Sarkozy came in, using his platform as G20 host to try to forge a set of enforceable guidelines to govern capital-flow management.
The IMF’s proposed guidelines recommend that countries deploy capital-account regulations only as a last resort — that is, after such measures as building up reserves, letting currencies appreciate and cutting budget deficits. In response to these suggestions, an independent task force, made up of former government officials and academics, was established to examine the use of capital-account regulations and come up with an alternative set of guidelines for the use of such regulations in developing countries.
Among other findings and recommendations, our task force pointed out that in the cases where the IMF found capital-account regulations to be effective, such measures were part of a broader macroeconomic toolkit and were deployed early on, alongside other measures, not as a “last resort.” Unless countries have signed trade and investment treaties that restrict the use of such regulations — and many have — the IMF’s Articles of Agreement give them full policy scope to manage capital flows as they see fit. Consigning such measures to “last resort” status would reduce the available options precisely when countries need as many tools as possible to prevent and mitigate crises.
Rather than embracing a globally enforceable code of conduct that could paradoxically lead to a compulsory opening of capital accounts across the globe, the IMF, the G20, the Financial Stability Board (FSB) and other bodies should try to reduce the stigma attached to capital-account regulations and protect countries’ ability to deploy them.
Indeed, the IMF could help countries to prevent evasion of the regulations, and together with the G20 and the FSB should lead a global dialogue about the extent to which countries should coordinate such regulations.
Countries’ interests are considerably aligned in favor of such coordination. Industrialized economies are seeking to recover from the crisis and want credit and capital to stay home to boost growth, while developing countries have little interest in gaining short-term capital inflows. This could form the basis for industrialized countries to adjust their tax codes and deploy other types of regulation to keep capital at home, while emerging markets implement measures aimed at changing the composition and reducing the level of potentially destabilizing inflows.
Jose Antonio Ocampo is a professor at Columbia University. Stephany Griffith-Jones is financial programs director of the initiative for policy dialogue at Columbia University. Kevin Gallagher is a professor of international relations at Boston University.
Copyright: Project Syndicate
Could Asia be on the verge of a new wave of nuclear proliferation? A look back at the early history of the North Atlantic Treaty Organization (NATO), which recently celebrated its 75th anniversary, illuminates some reasons for concern in the Indo-Pacific today. US Secretary of Defense Lloyd Austin recently described NATO as “the most powerful and successful alliance in history,” but the organization’s early years were not without challenges. At its inception, the signing of the North Atlantic Treaty marked a sea change in American strategic thinking. The United States had been intent on withdrawing from Europe in the years following
My wife and I spent the week in the interior of Taiwan where Shuyuan spent her childhood. In that town there is a street that functions as an open farmer’s market. Walk along that street, as Shuyuan did yesterday, and it is next to impossible to come home empty-handed. Some mangoes that looked vaguely like others we had seen around here ended up on our table. Shuyuan told how she had bought them from a little old farmer woman from the countryside who said the mangoes were from a very old tree she had on her property. The big surprise
The issue of China’s overcapacity has drawn greater global attention recently, with US Secretary of the Treasury Janet Yellen urging Beijing to address its excess production in key industries during her visit to China last week. Meanwhile in Brussels, European Commission President Ursula von der Leyen last week said that Europe must have a tough talk with China on its perceived overcapacity and unfair trade practices. The remarks by Yellen and Von der Leyen come as China’s economy is undergoing a painful transition. Beijing is trying to steer the world’s second-largest economy out of a COVID-19 slump, the property crisis and
Former president Ma Ying-jeou’s (馬英九) trip to China provides a pertinent reminder of why Taiwanese protested so vociferously against attempts to force through the cross-strait service trade agreement in 2014 and why, since Ma’s presidential election win in 2012, they have not voted in another Chinese Nationalist Party (KMT) candidate. While the nation narrowly avoided tragedy — the treaty would have put Taiwan on the path toward the demobilization of its democracy, which Courtney Donovan Smith wrote about in the Taipei Times in “With the Sunflower movement Taiwan dodged a bullet” — Ma’s political swansong in China, which included fawning dithyrambs