The G20 meeting in Cannes earlier this month was derailed by the pressing eurozone crisis. Actors were disappointed if they were looking for concrete action on global imbalances and the food crisis, let alone the new global monetary system that French President Nicolas Sarkozyboasted would be the goal of the summit when he first took the helm as host. But behind the scenes, the G20 actually delivered on a set of “coherent conclusions” on the management of speculative capital flows in emerging markets that should not be overlooked, especially by the International Monetary Fund (IMF).
Sarkozy assumed his role as head of the G20 during a period of excessive volatility in global capital markets that continues to this day. Because of loose monetary policy, low interest rates and a slow recovery in the North Atlantic, accompanied by high interest rates and rapid growth in emerging markets, the world’s investors flocked from north to south – to Brazil, Chile, South Korea, Taiwan and others. More recently, in response to eurozone jitters, capital has retreated from emerging markets to the “safety” of the United States – showing how dangerous speculative capital flows can be. New work released by the IMF this week suggests they are picking and choosing their direction from the G20.
In a significant reversal of past policy, in 2010 the IMF began recommending that nations deploy capital controls to mitigate the effects of speculative capital. Indeed, IMF work in 2010 showed that those countries that deployed capital account regulations were among the least hard-hit during the worst of the global financial crisis. As numerous countries across the globe began using controls in 2010-2011, further IMF work showed that those measures showed signs of working, too.
Sarkozy thus called for a code of conduct on capital controls and tasked the IMF to propose a set of guidelines for reform. The IMF delivered a set of guidelines in April of this year that met stiff resistance from the emerging market and developing countries that have been most successful in deploying capital controls. The IMF’s proposed guidelines recommend that countries deploy capital controls only as a last resort – that is, after such measures as building up reserves, letting currencies appreciate and cutting budget deficits.
Developing countries thought the guidelines missed the point. In the cases where the IMF found controls to be effective, such measures were part of a broader macroeconomic toolkit, and were deployed alongside other measures – not as a “last resort”. In October, these concerns were echoed by an independent task force of academics and former policy-makers that I co-chaired. We stressed that “consigning such measures to ‘last resort’ status would reduce the available options precisely when countries need as many tools as possible to prevent and mitigate crises.”
By the runup to the Cannes meeting, most of the G20’s apparatus was focused on the eurozone. However, a working group was formed to take the capital flows issue to the highest level. Headed by Germany and Brazil, the group forged the “G20 Coherent Conclusions for the Management of Capital Flows Drawing on Country Experiences”. The document was “endorsed by the G20 finance ministers and central bank governors in October, then endorsed by the G20 leaders themselves in Cannes.
In stark contrast to the IMF guidelines, the G20’s conclusions say that “there is no ‘one-size fits all’ approach or rigid definition of conditions for the use of capital flow management measures”, and that such measures should not be solely seen as a last resort. Instead, the G20 now calls on nations to develop their own country-specific approach to managing capital flows and, as Sarkozy said in his final Cannes speech, “the use of capital controls, and this is very important, is now accepted as a measure of stabilisation.”
Throughout the crisis, the IMF has usually been keen to accept new direction from the G20, but there are signs that it may be resisting the new G20 consensus on capital flows. The IMF’s latest report addresses the fact that industrialised country policies trigger unstable capital flows to developing countries and that the rich nations need to design policies that are mindful of such negative “spillovers”. Yet, the IMF merely adds that such principles will be added to their existing guidelines – seemingly ignoring the fact that those guidelines have now been superseded by the G20’s decisions.
The IMF should not ignore the G20’s direction on capital flows. Rather than pushing ahead on a globally enforceable code of conduct that could eventually lead to capital account liberalisation across the globe, the IMF should instead work to reduce the stigma attached to capital controls, protect countries’ ability to deploy them, and help nations police investors who evade regulation. G20 finance ministers, central bankers and heads of state have endorsed the use of capital controls by emerging markets, and on their own terms. The IMF should not pick and choose which directions by world leaders it will follow.