Today’s “currency wars” stand at the intersection of many critical issues. These include the ability of developing countries to deploy capital controls, the role of the US as global financial hegemon, the inadequacy of the global financial architecture, the power of the IMF, and the role of the BRICs (and other rapidly growing developing countries). All of these issues are at center stage both at today’s meeting of G20 Finance Ministers in Washington DC and at yesterday’s BRIC Summit in Sanya, China (which South Africa attended for the first time).
The IMF's welcome rethink on capital controls
Triple Crisis blogger Kevin Gallagher co-authored the following opinion article with José Antonio Ocampo in the Guardian on the IMF’s formal recognition of capital controls as a vital policy tool for regulating destabilizing capital flows in developing countries.
In contrast to most western governments, over the past two years, the International Monetary Fund (IMF) has boldly conducted one of the most honest self-assessments of its actions leading up to the financial crisis, has become somewhat critical of inflation-targeting and has endorsed the use of capital controls. In March of this year, the IMF held a full conference on rethinking macroeconomics where its organisers concluded that the crisis has shattered the economic orthodoxy behind the fund’s previous policies.
In preparation for its annual meetings next week, on Tuesday the IMF took its work on capital controls a step further by issuing two reports (one official report and one staff discussion paper) outlining when nations should use capital controls, and what types of capital controls should be used under the proper circumstances. The new reports amount to yet another big step forward for the IMF – though there is still a long way to go.
The IMF’s welcome rethink on capital controls
Triple Crisis blogger Kevin Gallagher co-authored the following opinion article with José Antonio Ocampo in the Guardian on the IMF’s formal recognition of capital controls as a vital policy tool for regulating destabilizing capital flows in developing countries.
In contrast to most western governments, over the past two years, the International Monetary Fund (IMF) has boldly conducted one of the most honest self-assessments of its actions leading up to the financial crisis, has become somewhat critical of inflation-targeting and has endorsed the use of capital controls. In March of this year, the IMF held a full conference on rethinking macroeconomics where its organisers concluded that the crisis has shattered the economic orthodoxy behind the fund’s previous policies.
In preparation for its annual meetings next week, on Tuesday the IMF took its work on capital controls a step further by issuing two reports (one official report and one staff discussion paper) outlining when nations should use capital controls, and what types of capital controls should be used under the proper circumstances. The new reports amount to yet another big step forward for the IMF – though there is still a long way to go.
The Boom in Capital Flows to Developing Countries in Historical Perspective: Going for a Bust– Again?
Yılmaz Akyüz, Guest Blogger
The post-war period has seen three generalized boom-bust cycles in private capital flows to developing countries (DCs) and we now appear to be in the boom phase of the fourth cycle. All these booms started under conditions of global liquidity expansion and low US interest rates, and all previous ones ended with busts. The first one ended with a debt crisis in the 1980s when US monetary policy was tightened, and the second one with a sudden shift in the willingness of lenders to maintain exposure in East Asia as financial conditions tightened in the US and macroeconomic conditions of recipient countries deteriorated because of the effects of capital inflows. The third boom developed alongside the subprime bubble and ended with the collapse of Lehman Brothers and flight to safety in late 2008.
Unlike previous episodes, the Lehman reversal did not cause serious and widespread dislocations in DCs because of generally strong payments and reserve positions, reduced mismatches in balance sheets and, above all, the short-duration of the downturn. Indeed, it was soon followed by a rapid recovery in 2009 as major advanced economies (AEs) responded to the crisis caused by excessive liquidity and debt by creating still larger amounts of liquidity to bail out troubled banks and governments, lift asset prices and lower interest rates.
The Brazilian Economy after Lula: What to Expect?
As President Obama completes his state tour of Brazil hoping to strengthen economic and diplomatic ties between the U.S. and Latin America’s largest economy, Triple Crisis blogger Matías Vernengo discusses what macroeconomic policies may characterize post-Lula Brazil. This article was published in the latest issue of the CESifo Forum.
Like Chile, which was governed by a left of center coalition for twenty years after the fall of Pinochet, Brazil, for the last sixteen years, has been ran by left of center parties under Fernando Henrique Cardoso and Luis Inácio Lula da Silva. The assumption of Dilma Rousseff guarantees the continuity of the left of center parties for another four years. Yet, contrary to the Chilean experience, in which Christian Democrats and Socialists, the main political parties in opposition to the dictatorship, formed a coalition, in Brazil the two main parties, the Party of Brazilian Social Democracy (PSDB) and the Worker’s Party (PT) have been political rivals.
The “Chilean Model”: Market regulation, not just liberalization, key to success
Ricardo Ffrench-Davis, Guest Blogger
President Obama’s 4-day visit to Chile, Brazil, and El Salvador starts this Saturday and brings issues of trade and economic opportunity between Latin America and the U.S. to the fore. In this post, Ricardo Ffrench-Davis identifies the specific policies that have driven the Chile’s high economic growth since 1973, particularly the strict regulation of the country’s capital account in the 1990s.
Chile is frequently presented as a paradigmatic case of successful economic reforms, by quite different authorities. Usually, these accounts sustain the ill-informed belief that there is one “Chilean model” responsible for success in recent decades. The fact is that in the nearly forty years that have elapsed since 1973 there have been several sub-periods, with significantly different policy approaches, heterogeneous external environments, and notably diverse economic and social outcomes. There is neither only one model nor only one outcome, as we show in our recent book, Economic Reforms in Chile: From Dictatorship to Democracy.
Triple Crisis Roundtable at the Eastern Economic Association Meetings
On Saturday, February 26, Triple Crisis bloggers Kevin P. Gallagher, Gerald Epstein, Ilene Grabel, and Matías Vernengo will be joined by Jane D’Arista and Leanne Ussher for a roundtable discussion on “CURRENCY WARS, G20 SKIRMISHES AND OTHER GOVERNANCE FAILURES”. The roundtable is part of the Eastern Economic Association Meetings at the Sheraton Hotel New York, at 10:30 am. Read contributions by Triple Crisis bloggers on currency issues, capital controls, and finance.
Financial governance and the crisis: New developments on the horizon
In what follows, I flag a number of new developments that relate to developing country and international financial institutions responses to the ongoing economic crisis.
1. Central banks to investors: “Don’t worry–no capital controls here!”
As Triple Crisis readers know, a great many developing countries have deployed controls on capital outflows and especially on inflows in response to the myriad challenges they face in the current environment. For some countries, controls on outflows have been implemented to mitigate financial instability and currency depreciation following capital flight. Rapidly growing developing countries, on the other hand, are using inflow controls to reduce inflationary pressures, cool asset bubbles, staunch currency appreciation, and protect economies from the financial instability induced by significant future reversal of inflows. Indeed, capital controls have emerged as a key weapon of choice in the modern day “currency war.”
Corporate Lobby Groups Issue Weak Attack on Economists Who Support Capital Control Flexibility
IPS and GDAE Rebut U.S. Chamber of Commerce, Business Roundtable, Other Big Business Critics
Major U.S. corporate lobby groups have issued a rebuttal to a letter sent by more than 250 economists to the Obama administration calling for a fresh approach to capital controls.
The Institute for Policy Studies and the Global Development and Environment Institute at Tufts University (GDAE) initiated the January 31 economist statement that provoked the corporate response. That initial letter called for trade reforms to “permit governments to deploy capital controls without being subject to investor claims, as part of a broader menu of policy options to prevent and mitigate financial crises.” The statement’s 257 endorsers include an ideologically diverse array of academics and former IMF and government officials.
The February 7 corporate letter, endorsed by the U.S. Chamber of Commerce, the Business Roundtable, and 15 other lobby groups, urges the Obama administration to reject this call, based on unsubstantiated arguments that permitting U.S. trading partners to support financial stability through the use of capital controls would undermine everything from U.S. jobs to national security.
Two years into the global financial crisis, Americans and citizens across the globe continue to suffer because of the actions of footloose capital. If we have learned anything from the crisis it is that sound regulations are needed to stem the ability of speculative capital to create financial bubbles that burst and then leave ordinary people to live with the disaster that follows.
A point-by-point response to the corporate claims:
Capital Controls and Trade Agreements: Pressure rises on Obama Administration
On Monday, we reported on a letter signed by more than 250 prominent economists, including many Triple Crisis bloggers, which was delivered to Secretary of State Hillary Clinton, Treasury Secretary Timothy Geithner, and US Trade Representative Ron Kirk, urging the Obama Administration to remove restrictions in its trade agreements with developing countries that limit the use of capital controls. The story was featured in the Wall Street Journal, Bloomberg, BNA Trade Daily (subscription only), and it was picked up on Naked Capitalism blog and the NY Times Dealbook blog among others. Kevin Gallagher, one of the letter’s initiators with Sarah Anderson of the Institute for Policy Studies, wrote his monthly column on the topic in the Guardian. Gallagher and Anderson were also interviewed by the Real News Network to explain why capital controls are an important policy tool developing countries can use to prevent financial instability.
Read the full letter and press coverage here. (The letter is also available in Spanish.) Read more on Gallagher’s work on capital controls.