Economists Issue Statement on Capital Controls and Trade Treaties

Since the onset of the global financial crisis, Triple Crisis bloggers have been commenting on the need for policy space for capital controls in developing countries and the need to reform US trade agreements, which generally prohibit their use.  To further that end, Triple Crisis co-chair Kevin Gallagher and Sarah Anderson of the Washington-based Institute for Policy Studies initiated an economist sign-on letter, which has more than 250 signatures including many Triple Crisis bloggers. It was released today and presented to Congress and the Obama Administration. The press release, with links to the letter and further information, follows.

More than 250 Economists Call for Trade Reforms to Allow Capital Controls

In a letter delivered January 31, more than 250 economists urged the Obama administration to reform U.S. trade rules that restrict the use of capital controls.

The statement reflects growing consensus among economists that capital controls, while no panacea, are legitimate policy tools for preventing and mitigating financial crises.

Signatories include several economists who have been generally supportive of free trade but are critical of the capital control restrictions (e.g., Arvind Subramanian, Senior Fellow of the Peterson Institute for International Economics and Nancy Birdsall, President of the Center for Global Development), as well as former IMF officials (e.g., Olivier Jeanne of Johns Hopkins University) and a Nobel laureate (Joseph Stiglitz).

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Curbing Hot Capital Flows to Protect the Real Economy

Triple Crisis bloggers Stephany Griffith-Jones and Kevin P. Gallagher published the following proposal to stem the excessive flows of speculative capital into developing countries in Economic and Political Weekly. In their approach, the United States and developing countries each regulate the outflow and inflow of hot money and redirect investment toward the real economy.

Curbing Hot Capital Flows to Protect the Real Economy

Developing countries are once again the destination for speculative capital flows with in inlows reaching pre-crisis levels, leading to currency appreciation and asset bubbles. Many of these nations are deploying prudential capital regulations to stem these flows. However, this may only be a partial remedy to the problem – such measures should be coupled with action by the developed countries in order to fully steer capital to productive use and to avoid future crises.

Download the full article at Economic and Political Weekly.

The Case for Controlling Capital Outflows

Stephany Griffith-Jones

Emerging countries, and even some low-income ones, are being flooded by short-term capital flows which they do not need; much of this money originates via the carry trade from the second wave of US quantitative easing (QE2). The intent of the US Federal Reserve is to expand the supply of credit in the US, so as to support the recovery and to lower long-term interest rates in the US.

So the impact of the carry trade is negative both for the US (as it undermines the aims of QE2) and for developing countries, which see their exchange rates become overvalued and their asset prices increase excessively.

The response of developing countries has been varied, but increasingly many of them are beginning to impose capital controls, both of the traditional kind, but also more innovative ones, that is those which deal with the new ways in which capital enters developing countries, in particular via derivatives. Indeed, many of these derivatives were initially invented to avoid precisely regulations on capital inflows or other types of financial activity.

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Beyond Rebalancing: The collapse of Chimerica

Alejandro Nadal

In 2006 Niall Ferguson and Moritz Schularick invented the term ‘Chimerica’ to illustrate the economic linkages that connected China and the United States. The new term summarized the fact that the world economic order was dominated by the combination of these two giants. Ferguson and Schularick also used the notion to explain the evolution of the asset price bubble in the US between 2002-2006. Their conclusion was that this new entity was an unsustainable chimera that should one day disappear. The time for this may be here.

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Capital Controls to Deter Hot Money Can Help the World Economy

Stephany Griffith-Jones and Kevin P. Gallagher

The following letter from Triple Crisis bloggers Griffith-Jones and Gallagher, drawing on their earlier Guardian article, appeared in the Financial Times today.

Sir, In your December 14 article “Capital inflows to Turkey spur plan to cut interest rates”, you point out that the Turkish central bank is considering cutting interest rates even though its economy is growing very fast, which would rather suggest the need to raise interest rates. This is the dilemma facing many emerging economies – and even poorer countries such as Uganda.

With low interest rates in the industrialised world, nations such as Turkey could get swamped with hot money via the carry trade in the event that they raise rates to cool their economies.

The influx of hot money may accentuate the very problem the nation is trying to alleviate by raising rates.

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European Debt Crisis and "Currency Wars" Halted G-20 Progress

Martin Khor
Part of a Triple Crisis series on the Nov. 11-12 G-20 meetings.

Triple Crisis blogger Martin Khor published the following opinion article for the Malaysia Star on the two issues that prevented progress at the G-20 meetings in Seoul: the new financial near-crisis in Europe and the ongoing debate about the competitive devaluation of currencies.

Inconclusive end to G-20 summit

The world economy remains in a web of serious problems with the potential to break out in new crises. The G20 summit last week discussed them but could not agree on the causes or how to resolve them. Even as the G20 leaders were meeting in Seoul, the real drama was taking place half a world away, as Europe stood on the brink of a new financial crisis.

Ireland faced a big jump in the interest cost of its debt, arising from (and giving rise to) fears that it would have to be bailed out, like Greece some months ago, or even face a debt default.

It seems like the crisis of investors losing confidence could also spread to Portugal, Spain and Italy.

Read the full article at the Star.

European Debt Crisis and “Currency Wars” Halted G-20 Progress

Martin Khor
Part of a Triple Crisis series on the Nov. 11-12 G-20 meetings.

Triple Crisis blogger Martin Khor published the following opinion article for the Malaysia Star on the two issues that prevented progress at the G-20 meetings in Seoul: the new financial near-crisis in Europe and the ongoing debate about the competitive devaluation of currencies.

Inconclusive end to G-20 summit

The world economy remains in a web of serious problems with the potential to break out in new crises. The G20 summit last week discussed them but could not agree on the causes or how to resolve them. Even as the G20 leaders were meeting in Seoul, the real drama was taking place half a world away, as Europe stood on the brink of a new financial crisis.

Ireland faced a big jump in the interest cost of its debt, arising from (and giving rise to) fears that it would have to be bailed out, like Greece some months ago, or even face a debt default.

It seems like the crisis of investors losing confidence could also spread to Portugal, Spain and Italy.

Read the full article at the Star.

Spotlight G-20: Capital Controls– They're Not Just For Developing Countries

Kevin Gallagher and Stephany Griffith-Jones
Part of a Triple Crisis series on the Nov. 11-12 G-20 meetings.

Triple Crisis bloggers Kevin Gallagher and Stephany Griffith-Jones published the following opinion article in the Guardian on G-20 leaders’ concerns about US dollar devaluation, in which they propose cooperative capital controls as a potential solution to the QE2 debate.

How the US can fix its QE2 problem

Ben Bernanke has been criticised from different sides and perspectives for quantitative easing. From one side, inflation hawks prefer austerity over expansion. Those who favour expansion and growth have valid concerns that it may not work and, instead, have negative global effects. At the G20, the United States got criticised – rightly – by emerging countries for the negative impact of QE2 on their economies.

Read the full article at the Guardian.

Spotlight G-20: Capital Controls– They’re Not Just For Developing Countries

Kevin Gallagher and Stephany Griffith-Jones
Part of a Triple Crisis series on the Nov. 11-12 G-20 meetings.

Triple Crisis bloggers Kevin Gallagher and Stephany Griffith-Jones published the following opinion article in the Guardian on G-20 leaders’ concerns about US dollar devaluation, in which they propose cooperative capital controls as a potential solution to the QE2 debate.

How the US can fix its QE2 problem

Ben Bernanke has been criticised from different sides and perspectives for quantitative easing. From one side, inflation hawks prefer austerity over expansion. Those who favour expansion and growth have valid concerns that it may not work and, instead, have negative global effects. At the G20, the United States got criticised – rightly – by emerging countries for the negative impact of QE2 on their economies.

Read the full article at the Guardian.

Spotlight G-20: Fed Bashing at the G-20: A Return to the Gold Standard Anyone?

Gerald Epstein
Part of a Triple Crisis series leading up to the Nov. 11-12 G-20 meetings.

A strange thing happened on the way to the G-20 meetings: world elite opinion has turned against the Federal Reserve’s “quantitative easing” (QE) program, the only significant “Keynesian” macroeconomic policy being implemented anywhere in the face of massive unemployment in much of the developed world; and this criticism is garnering some support from strange places, including among some progressive economists.  With all the hub-bub, the mercantilist policies of Germany and China and the pre-Keynesian Gold Standard-like stance of the European Central Bank (ECB), are getting a virtual free ride. Meanwhile, the true villain is escaping scrutiny all together: the elite consensus that there is too much sovereign debt in the world and so there cannot be any more fiscal expansion.

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