Damming Capital

Prohibition of certain transactions for prudential reasons also makes sense, particularly for borrowing in foreign currencies by economic agents that do not have revenues in those currencies. Alternatively, if those economic actors borrow from domestic financial institutions, regulations could resemble recent measures adopted in Brazil and South Korea, which include high capital and provision requirements for the associated liabilities.

In the recent IMF document, the Fund proposes a set of guidelines that countries should use for capital-account regulations (which they call capital-flow management measures, or CFMs). The guidelines correctly emphasize that these regulations should complement, not replace, counter-cyclical macroeconomic policies. But they make CFMs seem like an intervention of last resort, to be used only after everything else has been tried: exchange-rate adjustments, reserve accumulation, and restrictive macroeconomic policies. In fact, CFMs should play an integral part in avoiding excessive exchange-rate appreciation and reserve accumulation in the first place.

The IMF also prefers CFMs to be temporary. But this runs counter to strengthening the institutional framework on an ongoing basis, another recommendation of the guidelines. An institutional framework implies that CFMs should be part of a country’s permanent policy toolkit, and that regulations are strengthened or weakened depending on the phase of the business cycle. Temporary, improvised measures have had reduced effectiveness in many countries.

Moreover (and again counter to the guidelines), CFMs, almost by definition, require some discrimination between residents and non-residents. After all, we live in a global system in which different countries use different currencies, which implies that residents and non-residents have asymmetric demands for assets issued in those currencies.

Most importantly, a policy framework issued by international institutions like the IMF should include a clear mechanism to cooperate with countries using these policies. But none is to be found in the IMF’s guidelines, even though it recognizes that capital-account volatility is in a sense a negative externality inflicted upon recipient countries.

In fact, implementing the IMF’s guidelines may require eliminating provisions in several free-trade agreements (particularly those signed by the US) that restrict the use of capital-account regulations. More importantly, countries could use similar instruments, as part of a true international regulatory regime, to increase the effectiveness of their expansionary monetary policies.

Finally, any regulation in this area should recognize that capital-account convertibility is not obligatory for the IMF’s clients. This issue was settled in 1997, when then IMF Managing Director Michel Camdessus tried to include some commitment to capital-account liberalization in the Fund’s Articles of Agreement. The failure of that effort is implicitly recognized in the guidelines, which indicate that they do not imply any new obligations under IMF surveillance.

In other words, the new IMF framework is welcome, but countries will need the freedom to manage their capital account more than ever in the years ahead.

José Antonio Ocampo, former United Nations Under-Secretary-General for Economic and Social Affairs and former Finance Minister of Colombia, is Professor and Member of the Committee on Global Thought at Columbia University. Kevin Gallagher is Professor of International Relations at Boston University and Research Fellow at the Global Development and Environment Institute at Tufts University. Stephany Griffith-Jones is Head of Financial Research of the Initiative for Policy Dialogue at Columbia University.

Copyright: Project Syndicate, 2011.www.project-syndicate.org

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