Since the onset of the credit crunch in 2007, those countries — including China and India — that have kept tight control over financial inflows have fared better than those that have thrown open their borders.
And in recent years, several countries have quietly begun erecting breakwaters against the latest tidal wave of capital, driven by low interest rates in the West. Brazil, Argentina and Costa Rica have used various measures, including taxes on purchases of shares and bonds, and insisting that short-term investors deposit funds with the central bank for a year, to dampen the stop-go cycle.
It doesn’t mean no investment; just trying to discriminate between long-term capital that will help to deliver growth and the short-term whims of the herd.
The IMF responded to growing pressure for a rethink last year and issued two papers acknowledging that regulations on capital flows could be useful. However, it suggested their use should be restricted to crises and governed by a strict code of conduct. That idea was rejected by emerging economies, which are wielding growing influence. The G20, a forum in which China, India and Brazil have a strong voice, issued its own far more radical study in October. The tide is turning.
One unlikely recent champion of regulations is the Bank of England. The shock of being caught unawares by the vulnerability of the UK’s financial system in 2007 and 2008 caused soul-searching, and recent papers and speeches have helped build the case for new thinking.
Two studies released last month suggested cross-border flows of capital will increase radically in the coming years as developing countries grow in size; that the UK will be particularly vulnerable to future sudden reversals in these flows, because of its vast external balance sheet; and that the international community should consider drawing up rules governing how and when countries can act to protect themselves.
If there’s one thing policymakers should have learned over the past four years, it’s that financial markets can’t be left to run the world themselves.