The Limited Times

Now you can see non-English news...

The IMF continues to lag behind on capital controls

2022-05-22T16:52:23.017Z

Rich countries have made the most of the flexibility of the restrictions granted by the body The International Monetary Fund's (IMF) revised policy framework for managing cross-border financial flows, approved by its board of directors last month, expands the circumstances under which countries can restrict capital inflows. Unfortunately, it also overly ties their hands and fails to take into account the many real-world contexts in which the IMF's advice is either appropriate or not. So w



The International Monetary Fund's (IMF) revised policy framework for managing cross-border financial flows, approved by its board of directors last month, expands the circumstances under which countries can restrict capital inflows.

Unfortunately, it also overly ties their hands and fails to take into account the many real-world contexts in which the IMF's advice is either appropriate or not.

So while the volatility of capital flows is already a constant challenge for many emerging and developing economies, the IMF framework will reduce countries' options for achieving their social goals and could ultimately make the economy less stable. World economy.

The IMF's earlier framework, known as the "Institutional View" (VI), held that controls on capital outflows were legitimate only if a country was in the throes of a crisis, and that controls on inflows should only be used as a last resort. resource when the country was experiencing an increase in foreign money.

The VI was a political compromise that reflected the deep divisions between IMF member states (including some of the largest shareholders) that were in favor of full liberalization of capital movements, and those (including many emerging and developing economies) that they wanted the approval of the IMF to adopt policies aimed at mitigating volatility.

Some countries opposed the VI not because they disagreed with that framework, but because they considered it an “overreach”.

They were concerned that the IMF was going beyond the powers defined by its constitution (the Articles of Agreement), which gives countries considerable room for maneuver on capital control policies, and that a future IMF management team might suddenly change course and try to restrict what countries could do.

The IMF's job is to prevent national policies from generating negative effects on an international scale.

The Fund's founding fathers, John Maynard Keynes and Henry Dexter White, deeply concerned about the implications of competitive currency depreciations, emphasized the rules against beggar-thy-neighbour policies in the IMF's Articles of Agreement.

More recently, we have seen what can happen when financial problems in one country spill over into others, as happened during the global financial crisis.

When the IMF Articles of Agreement were written, capital controls were widely used by most countries, including today's advanced economies.

Therefore, the Articles of Agreement did not grant the IMF authority to promote the liberalization of the capital market.

Moreover, the last attempt to expand the Convention, at the IMF's annual meeting in Hong Kong in 1997, came at the worst time, right in the midst of the outbreak of the Asian financial crisis, precipitated by massive capital outflows.

In any case, small countries without undervalued currencies do not generate negative externalities or apply beggar-thy-neighbour policies.

Therefore, when they do resort to capital controls, it is often in circumstances that have little to do with the IMF's remit.

Consider the social goal of ensuring affordable housing for the middle class, which many advanced and emerging market economies have pursued by restricting foreign purchases of domestic real estate.

These restrictions are not the responsibility of the IMF, especially if they do not significantly depreciate the exchange rate or cause significant cross-border financial effects.

However, the IMF recently urged Australia to reconsider a small tax on real estate investments in Tasmania (population 541,000), even though the measure may not be significant in macroeconomic terms.

And this is just one blatant example among many others.

These councils, and the positions related to countries as diverse as Canada or Singapore,

The IMF's revised framework wisely allows for precautionary measures against capital inflows in some circumstances.

The Fund has realized that it is unwise to wait for financial imbalances to reach a critical threshold before doing anything about it.

This justification, essentially for preventive macroprudential regulation, applies both to imbalances generated by hot money from abroad and to those caused by excessive borrowing from domestic sources.

But what about the other side of the equation, capital outflows?

Now that the US Federal Reserve is raising interest rates, this issue has become very relevant for many emerging markets.

Yet the IMF's new framework strangely eludes it.

In general, economists are deeply suspicious of capital outflow controls, out of concern that such policies necessarily amount to partial expropriation.

But it is a matter of policy design, and whether the rules of the game are clear and known in advance.

For example, a pre-announced policy to tax short-term capital outflows (but not longer-term flows), and to impose more extensive controls in the event of a crisis, could ultimately improve macroeconomic stability and, in that sense, make foreign investment more attractive.

It is part of the IMF's mandate to assess whether capital outflow controls are necessary, how their design can be improved, and what role they might play in the country.

Conventional wisdom is constantly evolving to take into account advances in economic theory, which has clearly demonstrated the wisdom of imposing capital controls in certain circumstances.

What was taboo in the late 1990s (when the IMF advocated full capital account liberalization) differs from what was taboo in 2012 (when the IMF supported entry controls during upturns) and in 2022 ( when it endorsed preventive entry controls).

It seems clear, even to the IMF, that capital outflow controls could have been recommended as part of its loan to Argentina from former President Mauricio Macri.

Without these controls, the IMF simply allowed international investors to move their money out of the country, leaving Argentina with a $44 billion debt load and little profit.

In circumstances like the ones Argentina faced, the IMF should consider not just allowing controls on capital outflows, but actually insisting on them.

The IMF Articles of Agreement rightly grant ample room for maneuver to member state governments in applying capital controls, provided that their policies do not harm other countries in the form of beggar-thy-neighbour.

Rich countries have made the most of this flexibility.

The IMF could do worse than uphold the spirit of its founders.

Joseph E. Stiglitz

, Nobel laureate in economics, is a professor at Columbia University.

Jonathan D. Ostry,

incoming professor of the practice of economics at Georgetown University, is a former deputy director of the IMF

© Project Syndicate 1995–2022

Translation of News Clips

Exclusive content for subscribers

read without limits

subscribe

I'm already a subscriber

Source: elparis

All business articles on 2022-05-22

You may like

Business 2022-03-26T08:41:02.452Z

Trends 24h

Latest

© Communities 2019 - Privacy