Capital Controls are Prudent but not Easy

Kevin P. Gallagher, Financial Times, October 20, 2010

Triple Crisis blogger Kevin P. Gallagher was invited to submit an article for the Financial Times as part of a three-way debate on the use of capital controls. His piece begins below, and you can read the full article at Financial Times, as well as the other positions written by Guillermo Calvo and Gerard Lyons. For more on the issue from Triple Crisis, see Ilene Grabel’s recent post, and other contributions on capital controls. Read more on Gallagher’s work on issue for the Global Development and Environment Institute.

Emerging markets have their hands full trying to stem currency appreciation and asset bubbles due to their higher interest rates and formidable economic recoveries relative to the west. The situation will only worsen as world leaders continue to fail to reform global finance and the US moves to another round of quantitative easing.

In times like this, capital controls have regained their legitimacy as a tool emerging markets can resort to.

One can make the argument that many emerging markets eventually need to let their currencies appreciate, in real terms. But flows of speculative capital that stop and start suddenly are a destabilizing way to that end….

Read the full article

3 Responses to “Capital Controls are Prudent but not Easy”

  1. rayllove says:

    I am a little confused on whether capital controls are a violation of WTO regulations?

    My confusion extends to IMF considerations too.

    Actually there are countless concerns that confuse me but those above may be too much to ask as it is. Thanks.

  2. Kevin Gallagher says:

    Dear Raylove,

    I spell most of this out in a full length report for the UN here:

    In a nutshell:
    1) Capital controls are only violations of the WTO if a nation has positively “listed” cross-border financial services in its GATS commitments. There is however, both a prudential exception and a balance of payments exception under the GATS. It is not clear whether these exceptions can be used for K controls. Most US trade agreements effectively mandate the liberalization of all cross-border financial services and DO NOT have any exceptions.
    2) The IMF Articles of Agreement have NO jurisdiction over capital account transaction. So, any capital controls on capital account transactions have always been “legal” under the IMF. The IMF, for a long time, advised nations to liberalize their capital accounts and implicitly made such liberalization part of their conditionality packages. That has now changed. Just last week the IMF recommended that Colombia use K controls.

  3. rayllove says: