Do nations have the policy space to deploy capital controls to prevent and mitigate financial crises? In a new report for the Intergovernmental Group of Twenty-Four on International Monetary Affairs and Development (G-24) I examine the extent to which measures to mitigate the global financial crisis and prevent future crises are permissible under a variety of bi-lateral, regional, and multi-lateral trade and investment agreements. I find that the United States trade and investment agreements, and to a lesser extent the WTO, leave little room to maneuver when it comes to capital controls. This is the case despite the increasing economic evidence showing that capital controls can be useful in preventing or mitigating financial crises.
Ask an Economist: India's Capital Account Convertibility
Triple Crisis Blog has invited readers’ questions in advance of the April 24-25 IMF/World Bank meetings in Washingon. See all of the questions and answers here. A reader asked:
Q: Why is India moving towards full capital account convertibility, even though it knows about financial market volatility and the recent crisis?
Chandrasekhar: India has adopted a peculiar position on the issue of convertibility. Just before the East Asian financial crisis of 1997 broke, India was all set to make the rupee fully convertible on the capital account. A road map for full convertibility had been drawn up. This would have allowed residents in India to convert their wealth into foreign exchange and transfer it abroad. The crisis sent out a clear signal that this is bad policy and can pave the way for instability and even a currency crisis. That signal prevented the government from opting for such a misguided policy.
Ask an Economist: India’s Capital Account Convertibility
Triple Crisis Blog has invited readers’ questions in advance of the April 24-25 IMF/World Bank meetings in Washingon. See all of the questions and answers here. A reader asked:
Q: Why is India moving towards full capital account convertibility, even though it knows about financial market volatility and the recent crisis?
Chandrasekhar: India has adopted a peculiar position on the issue of convertibility. Just before the East Asian financial crisis of 1997 broke, India was all set to make the rupee fully convertible on the capital account. A road map for full convertibility had been drawn up. This would have allowed residents in India to convert their wealth into foreign exchange and transfer it abroad. The crisis sent out a clear signal that this is bad policy and can pave the way for instability and even a currency crisis. That signal prevented the government from opting for such a misguided policy.
Capital and Development: Coping with the Carry Trade
Once again, emerging markets have become the (often unwilling) “beneficiaries” of a surge in private capital flows. Once again, this is not really being used within most receiving economies, since they continue to add to their external reserves. And once again, this is creating additional and often complicated problems of macroeconomic management, with conflicts between different domestic goals.
Some of this renewed capital inflow relates to the perceptions of private investors about better long term economic growth prospects in countries like China, India, Brazil and so on. But much of this is simply what is known as the “carry-trade”, which is essentially the attempt to benefit from different rates of return on assets in different currencies.
Ask an Economist: The Value of the Yuan, part 2
Triple Crisis Blog invited readers’ questions in advance of the April 24-25 IMF/World Bank meetings in Washingon. See all of the questions and answers here. A reader asked:
Q: There has been a lot of discussion recently about the over-valuation of the Chinese currency. How do we know how much it is overvalued? What would the implications be for US and Chinese workers if the government were to decide to devalue it?
Chandrasekhar: The argument really is that the Chinese currency is undervalued (because it is pegged to the dollar through central bank intervention) and needs to appreciate so as to make the dollar prices of Chinese exports higher and the RMB price of Chinese imports lower.
Ecological Economics and Money: Nadal Responds to Daly
The Triple Crisis Blog and The Daly News blog are engaged in an interesting discussion of how the field of Ecological Economics treats money, partly in response to Alejandro Nadal’s piece on Triple Crisis, “Money Matters, Mr. Daly.” Herman Daly posted a comment there and posted a piece on the subject on his own blog, “Money and the Steady State Economy.” Rob Dietz also has a related post there, “Money is a COW.” Here, Nadal, author of the forthcoming volume from Zed Books, on the macroeconomics of sustainability, responds:
I’d like to make three comments:
1. For a very long time trade liberalization was the only dimension of macroeconomic policy that attracted the attention of scholars concerned with sustainability. That monetary reform is now being discussed in this connection is a step in the right direction. Both Daly’s and Dietz’s contributions will help move the debate to a field of analysis that has been badly neglected.
Global Imbalances Are Much More than the US-China Relations
Triple Crisis Blog invited readers’ questions in advance of the April 24-25 IMF/World Bank meetings in Washingon. This piece is based on a question from a reader on the over-valuation of the Yuan.
The problem of global imbalances is widely seen as a major issue to be resolved if the world economy is to be on track for a sustained recovery. And this problem is also usually discussed as arising from the economic relations between the United States and China.
In this view, the US has been over-consuming beyond its means, thereby having a large trade deficit, while China has been growing as a result of exports, thus earning large trade surpluses and investing them in US treasuries, thereby making the US over-consumption possible.
Ask an Economist: Carbon tax or permits?
Triple Crisis Blog invited readers’ questions in advance of the April 24-25 IMF/World Bank meetings in Washingon. See all of the questions and answers here. A reader asked:
Q: Do you think that carbon/pollution/energy taxes could be a mechanism that helps us reduce our use of fossil fuels, while bringing funds to the governments that need them to pay their climate debt?
Boyce: Pricing carbon – via taxes or permits – is crucial to reduce the use of fossil fuels. Taxes and auctioned permits are equivalent: the only difference is that taxes set the price and let the quantity of emissions vary, whereas permits set the quantity and let the price vary. Both yield revenues to governments.
Ask an Economist: Assistance Still Needed for the Poorest
Triple Crisis Blog has invited readers’ questions in advance of the April 24-25 IMF/World Bank meetings in Washingon. See all of the questions and answers here. A reader asked:
Q: Will we finally see an IMF/WB policy that truly acknowledges the rights of the poor and the least developed countries? Will the reforms of the IMF/WB push for localization and food sovereignty as ways to face poverty?
Grabel: Certainly the IMF/WB have been discussing the poor and the poorest developing countries a good deal of late, especially in relation to the effects of the financial crisis on the most vulnerable. And some of the assistance packages that they’ve negotiated have paid somewhat more attention to the most vulnerable groups, such as pensioners (though concrete financial support for the most vulnerable groups has been pretty scant).
Ask an Economist: Invisible Hand and Employment
Triple Crisis Blog has invited readers’ questions in advance of the April 24-25 IMF/World Bank meetings in Washingon. See all of the questions and answers here. A reader asked:
Q: Do economists have a successor paradigm to the “invisible hand” theory, in which it is NOT expected that everyone should need to be employed? Perhaps something like Random Welfare, coupled with more environmental respect.
Nadal: First, the invisible hand paradigm should have been abandoned since 1974, when the Sonnenschein-Mantel-Debreu theorem was first published. This result showed that after 200 years, the invisible hand metaphor remained just that, a metaphor. There was never an invisible hand “theory” showing how, in the general case, equilibrium prices were formed. If this was a paradigm, it was more for ideological reasons than “scientific” superiority.