Capital controls: “The new normal” (Part II)

Ilene Grabel

In a recent post, I argued that capital controls have become the new normal. This is welcome news to progressives who have long argued that developing countries should have the right to deploy capital controls.  A reasonable question for progressives to ask at this point is why are capital controls breaking out all over?

There are several possible (and no doubt, mutually reinforcing) reasons for the resurgence of controls.

First, on a practical level, they are needed in many countries. Policymakers in the developing economies that are performing well now are using these policies to contain the asset bubbles (and attendant inflationary pressures and currency appreciation) stimulated by the foreign investment that is flooding developing economy markets (itself the consequence of the low interest rates and dim economic prospects of the USA and Europe).

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Capital controls: “The new normal” (Part I)

Ilene Grabel

Like many progressive economists, I’m addicted to economics and business news. These days one phrase is repeated constantly—“The new normal.” Indeed, National Public Radio’s show, “Planet Money” recently featured a story on this omnipresent phrase.  The new normal is shorthand for features of a dismal new economic reality to which the (investing) public must adjust. The new realities of our era include lower rates of return on stocks, bonds and real estate; larger government budget deficits which precipitate higher inflation rates; sluggish (and even negative) rates of growth in rich countries; and a shift in economic (and political) power to the world’s dynamic developing countries.

But another new normal has flown in under the pundit’s radar screen. This new normal is the proliferation of capital controls, which are being implemented rather widely across the developing world.

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Korea-US trade deal would outlaw capital controls

Following up on Kevin Gallagher’s Triple Crisis post on the proposed US-China investment treaty, Gallagher has outlined in a recent column in The Guardian how the pending Korea-US Free Trade Agreement would prevent the Korean government from doing precisely what it is now doing to manage the financial crisis: control the flow of foreign currencies.

“South Korea will join the growing group of nations that have recently resorted to currency controls in the wake of the global financial crisis. As a rash of new research has shown, such controls are legitimate tools to prevent and mitigate financial crises.

“Yet if the pending South Korea-US free trade agreement that the US just agreed to expedite at the G20 meetings had been ratified by now, South Korea’s actions would be deemed illegal.

“As the Obama administration works to put Bush-era trade policy behind and forge a ’21st century trade policy’ it should fix this flaw that could be fatal to South Korea’s financial stability….”

Read the full Guardian column.

The WTO and the Financial Crisis

Kevin P. Gallagher

On Tuesday, June 29 the World Trade Organization’s Committee on Financial Services will hold its much anticipated session on the WTO and the financial crisis.  Developing countries should follow this session with great scrutiny.  The WTO has claimed that it played no negative role in the financial crisis.  However, research by the IMF and the UN suggest otherwise.

Work by independent economists, the IMF, and the World Bank has shown that those nations that capital account liberalization is not associated with economic growth in developing countries.  Indeed, developing nations need to cross a minimum threshold of institutional development before such liberalization can help spur growth.

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The IMF's mid-life crisis

Ilene Grabel

Many Triple Crisis bloggers have been examining the effects of the global financial crisis on decision makers at the IMF, particularly as concerns the policy space of developing countries. In these two interviews, Triple Crisis blogger Ilene Grabel considers the effect of the crisis on the economics profession and, in particular, on the policy advice proffered to developing countries by the IMF during the current financial crisis. Ilene focuses on whether the crisis has created more space for developing countries to implement capital controls, and she also discusses the draft proposals for taxing the financial sector that the IMF has presented to the G20 for consideration at its June meeting in Toronto.

The IMF’s mid-life crisis

Ilene Grabel

Many Triple Crisis bloggers have been examining the effects of the global financial crisis on decision makers at the IMF, particularly as concerns the policy space of developing countries. In these two interviews, Triple Crisis blogger Ilene Grabel considers the effect of the crisis on the economics profession and, in particular, on the policy advice proffered to developing countries by the IMF during the current financial crisis. Ilene focuses on whether the crisis has created more space for developing countries to implement capital controls, and she also discusses the draft proposals for taxing the financial sector that the IMF has presented to the G20 for consideration at its June meeting in Toronto.

Losing Control: Capital Controls and Trade Agreements

Kevin P. Gallagher

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.

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Capital and Development: Coping with the Carry Trade

Jayati Ghosh

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.

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Ask an Economist: Is Liberalization the Answer?

Kevin Gallagher

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: The IMF and the World Bank claim that the only way to deal with the current crisis is through further liberalization. Aren’t globalization and free trade what caused poverty and global warming in the first place?

Gallagher: I’m not sure that these two institutions claim that “the only way” to deal with the crisis is through further liberalization. The IMF has just called for a levy on bank balance sheets and has cautiously endorsed capital controls to stem inflows of speculative capital. They also called for fiscal stimuli a year ago.

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Ask an Economist: Reforming the IMF and World Bank

Ilene Grabel

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: Absolute poverty and increasing inequality remain serious issues in spite of WB/IMF development loans, even in countries with high economic growth.  What reforms would you suggest to ensure that aid actually reaches the people who are suffering? How can these organizations take steps to move away from the ideology of neo-liberalism towards developing scientifically-based economic policies that are pro-poor? How can the Bretton Woods Institutions best measure implementation of pro-poor government policies?

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