Spotlight G-20: Why Capital Controls Are Not All Bad

Ilene Grabel and Ha-Joon Chang, from Financial Times
Part of a Triple Crisis series leading up to the Nov. 11-12 G-20 meetings.

Last Monday, Triple Crisis contributor Ilene Grabel co-authored the following piece for the Financial Times with noted author Ha-Joon Chang, building on an FT-hosted debate that included an earlier contribution by Triple Crisis blogger Kevin P. Gallagher. They urge the leaders of the G-20 economies to acknowledge the need for a new international financial architecture in the wake of the global financial crisis and the widespread adoption of currency controls in the developing world at their upcoming summit in Seoul, on November 11-12. Their piece kicks off the Triple Crisis Blog’s “Spotlight: G-20” series. Starting today and running through the G-20’s crucial meetings, we will feature daily pieces from Triple Crisis bloggers and guest contributors on the key issues that need to be addressed at the upcoming summit.

Was it really just over a decade ago that the International Monetary Fund and investors howled when Malaysia imposed capital controls in response to the Asian financial crisis? We ask because suddenly those times seem so distant. Today, the IMF is not just sitting on its hands as country after country resurrects capital controls, but is actually going so far as to promote their use. What about the investors whose freedoms are eclipsed by the new controls? Well, their enthusiasm for foreign lending and investing has not been damped in the least. So what is going on here? In our view, nothing short of the most significant transformation in global financial management of the past 30 years.

Read full article at Financial Times

Read more capital controls from Triple Crisis and at the Global Development and Environment Institute.

Understanding Instability: Mandelbrot, Fractals, and Financial Crises

Alejandro Nadal

Lightning in the sky does not follow a straight line. The irregular patterns in a cauliflower or the capricious forms of a tree’s branch are a challenge to the clean geometric figures we learn in school. Neither the straight lines, nor the smooth curves of that geometry exist in nature. But after the wonderful work of Benoit Mandelbrot it is now possible to get closer to a theory of the manifold wrinkles and rough surfaces that are the stuff of our universe. And our economies.

Ten days ago this great mathematician, the creator of fractal geometry and other wonders closely related to chaos theory, passed away.

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Britain’s Austere Future: Zombie Flick or Godzilla Movie?

Mark Blyth

The Triple Crisis Blog is pleased to welcome Mark Blyth as a regular contributor.

In my first triple crisis piece I wrote about John Quiggin’s new book thesis concerning Zombie Economic ideas. Lead zombie of the moment is the idea of fiscal austerity as the way out of the crisis, despite oodles of evidence to the contrary. In short, we need to cut budgets to restore fiscal sanity, and we know that this is the way forward since small open economies in the 1980s (Ireland, Belgium, Denmark) that cut their budgets still grew. The economic (ir)rationale for this has been pointed out by Krugman, Stiglitz, and others. But for me the most interesting, and most tragic part of this story, are the distributional consequences of these policies, and the politics that they engender.

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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….

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Capital Controls, ‘Currency Wars,’ and New Global Financial Architecture

Ilene Grabel

For those of us advocating change in the global financial architecture, the last few months have been fairly exhilarating.  Let’s recap…

Capital controls, as I’ve written previously, have become the ‘new normal’ in the developing world.  It’s hard to keep up with developments in countries that have introduced or tightened existing controls since I last wrote about them here (see below). IMF staff now write about capital controls with a taken-for-granted attitude (see even the institution’s October 2010 Global Financial Stability Report, which contains the by now customary bland language on the role and efficacy of capital controls, e.g. p. 28).

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Conflicts of Interest and the Financial Crisis: It’s Also the Economics Profession, Stupid!

Gerald Epstein

Even the Queen of England could see that the economics profession messed up big time in the lead up to the financial meltdown.  On a visit to the London School of Economics in 2009 she asked why economists’ failed to foresee the crisis. After a “serious” study, a group of eminent economists’ said economists had a “failure of imagination”, suggesting, perhaps, the need for more envisioning courses in Economics PhD programs. Paul Krugman pinned it mostly on economic theorists’ obsession with mathematical beauty and elegance at the expense of true understanding, what he called “mistaking beauty for truth”.

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Basel III: One More Victory for Finance

C.P. Chandrasekhar

Even as governments in individual countries are struggling to move forward on post-crisis financial reform aimed at preventing another crisis, the G20 seems to be settling for marginal modifications of the pre-existing framework for global regulation– at the centre of which are the Basel norms. The Basel norms in their various versions essentially require banks to hold capital amounting to a certain proportion of their risky assets in forms that are available and easily accessed to cover losses. Capital that was free of encumbrances and liquid to different degrees was ranked Tier I or Tier II, with each Tier required to be kept at a certain proportion of the value of risk-weighted assets.

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Academic Experts Call for Reform of Investment Treaties

Gus Van Harten, Guest Blogger

Investment arbitration is a new field of law and lawyering. It disciplines governments in extraordinary ways, and regulates legislative choice and policy discretion on questions of profound public importance.

Yet the system is sometimes portrayed by practitioner-advocates as technical, obscure, or simply par-for-the-course. Debates are often dominated by lawyers and arbitrators with an obvious stake in the system’s perpetuation.

Not everyone who has expertise in investment law, arbitration and regulation supports the current arrangements, however. I am one of (now) 48 academics who has expressed concerns about the investment regime. (I do not speak for other supporters of the statement here; the statement speaks for itself and any elaborations expressed in this comment are in my name only.)

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Decentralizing Global Finance

The Triple Crisis Blog is pleased to welcome Diana Tussie as a regular contributor. She heads the Department of International Relations at FLACSO/Argentina and is the founding director of the Latin American Trade Network (LATN).

Diana Tussie

Every economic crisis buries some practices and gives rise to new ones. What we see today is a move away from what Robert Wade called the “High Command “of global finance and the rise of less formalized institutions. The G-20 may be one of these.

So far the G-20 summit agenda focused heavily on the question of the regulation of international financial markets. In addition, the G-20 leaders made a commitment at their first summit in November 2008 to press on with the reform of the Bretton Woods institutions in order to give greater voice and representation to emerging and developing economies. Two years later the Toronto summit closed on a dull tone.

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