[Debate] Gallagher: The IMF must accept the G20's decision on capital controls

Riaz K Tayob riaz.tayob at gmail.com
Wed Nov 30 22:35:20 GMT 2011

/Kevin P. Gallagher published the following opinion article in The 
on Tuesday, November 29. /

  The IMF must heed G20 decisions

The G20 agreed that developing countries are free to use capital 
controls against speculators. Now the IMF should respect that

*Kevin P. Gallagher *
Tuesday 29 November 2011 17:59 EST

The G20 <http://www.guardian.co.uk/world/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 Sarkozy 
<http://www.guardian.co.uk/world/nicolas-sarkozy> boasted 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 <http://www.guardian.co.uk/business/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 
<http://www.guardian.co.uk/world/usa> -- showing how dangerous 
speculative capital flows can be. New work released by the IMF this week 
suggests <http://www.imf.org/external/pp/longres.aspx?id=4613> 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 
<http://www.imf.org/external/np/pp/eng/2011/021411a.pdf> 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 
<http://www.imf.org/external/pubs/ft/survey/so/2011/NEW040511B.htm> 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 
<http://www.bu.edu/pardee/2011/09/16/capital-flows-task-force/> 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 
"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.

guardian.co.uk © Guardian News and Media Limited 2011

Read other Gallagher columns 
<http://www.guardian.co.uk/profile/kevingallagher> in The Guardian
Follow Kevin P. Gallagher on Facebook: 
Learn more about GDAE's research on capital flows 
more about GDAE's Globalization and Sustainable Development Program 

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