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IMF head discusses contolling capitalflows for short term

IMF chief Horst Koehler said in an interview published yesterday that he was not opposed to some form of control on capital flows for some emerging countries.

"In the long term, the free flow of capital is beneficial," he told the French business daily La Tribune.

Koehler, a staunch advocate of market liberalization in developing countries, however made it clear that in the short term "it is essential to take into account the financial maturity of the country involved."

Taking Chile as an example, he noted that Chilan authorities felt there was a need for controlling capital inflows.

"The objective was not to prevent capital from entering Chile, but to control its nature. The authorities feared an overly big inflow of capital in the short term," he added. "I favor this type of control. If other countries wanted to do the same, I would not oppose it."

Koehler however conceded that the IMF, which has long pressed for market liberalization in emerging countries to give them access to outside financing and western capital markets, also made them vulnerable to the discontent of foreign investors, who suddenly withdrew their funds and triggered a financial crisis.

"The multiplication of crises turned the spotlight on our weaknesses. There is a new culture at the IMF. We must listen, learn and only then draw conclusions," he said.

"No one is perfect. Not even the IMF. One of the lessons drawn from past crises, notably in Asia, is that these countries liberalized their capital flows too quickly," Koehler said.

"They should have first established the appropriate legal framework, a banking oversight system and a risk management culture. We have drawn the consequences," he added.

He also stressed the need to give more importance to "local development of capital markets."
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