Stiglitz and Ostry | IMF still behind on capital controls | Business
The International Monetary Fund’s 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 excessively ties countries’ hands and fails to address the myriad of real-world contexts in which IMF advice is, or is not, appropriate. So, while volatile capital flows already pose an ongoing challenge to many emerging and developing economies, the IMF framework will reduce countries’ options to achieve their social goals and could ultimately make the global economy less stable.
The IMF’s previous framework, approved in 2012 and known as the Institutional View, or IV, argued that controls on capital outflows were only legitimate when a country was in crisis, and Entry controls were to be used only as a last resort when the country experienced a sharp increase in foreign currency.
The IV was a political compromise, reflecting deep divisions between IMF member states, including some of the major shareholders, who favored full liberalization of capital movements, and those, including many emerging and developing economies. , who wanted the blessing of the IMF to adopt policies aimed at mitigating volatility. .
Some countries opposed the IV not because they disagreed with it, but because they saw it as “overbroad”. They feared that the IMF was going beyond the mandate set out in its constitution – the IMF’s Articles of Agreement – which gives countries considerable leeway over capital control policies, and that a future IMF board could suddenly change course and try to limit what countries could do.
The IMF’s job is to prevent national policies from generating negative international spillovers. The Fund’s founding fathers, John Maynard Keynes and Henry Dexter White, deeply concerned about the implications of competitive currency depreciations, emphasized rules against “beggar-your-neighbor” policies in IMF articles. More recently, we have seen what can happen when financial problems in one country spread to others, as happened during the global financial crisis.
When the IMF Articles of Agreement were written, most countries – including today’s advanced economies – made extensive use of capital controls. The Articles of Agreement therefore did not give the IMF the power to push for the liberalization of the capital market. Moreover, the last attempt to extend the statutes – at the 1997 IMF Annual Meeting in Hong Kong – came at the worst time, just as the Asian financial crisis, precipitated by massive capital outflows, was erupting. .
In any case, small countries without undervalued currencies do not generate negative externalities or engage in beggar-thy-neighbour policies. Thus, when they resort to capital controls, it is usually in circumstances that have little to do with the powers of the IMF.
Consider the social goal of providing affordable housing for the middle class, which many advanced and emerging economies have pursued by limiting 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 spillovers.
Nevertheless, the IMF recently urged Australia to reconsider a small property entry tax in Tasmania (population 541,000), even if the measure could not be macro-economically meaningful. And this is just one glaring example among many others. Such advice and related positions involving countries as diverse as Canada and Singapore undermine the credibility of IMF “surveillance” or control.
The IMF’s revised framework appropriately allows preventive measures against capital inflows under certain circumstances. The Fund has realized that it is unwise to wait for financial imbalances to reach a critical point before acting. This rationale, essentially for preventive macroprudential regulation, applies both to imbalances generated by speculative money from abroad and to those generated by excessive borrowing from domestic sources.
But what about the output side of the equation? Now that the US Federal Reserve is raising interest rates, this question has become extremely relevant for many emerging markets. Yet the new IMF framework curiously begs the question.
Economists are generally deeply suspicious of exit controls, fearing that such policies necessarily amount to partial expropriation. But the question is one 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 impose more extensive controls in the event of a crisis could, over time, strengthen macroeconomic stability. and, in this respect, to make foreign investment more attractive.
It is part of the IMF’s job to assess whether exit controls are needed, how their design can be improved, and what role they could play in the country.
Conventional wisdom is constantly evolving to reflect advances in economic theory, which have clearly demonstrated the prudence 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 approved inflow controls during surges, and in 2022, when he approved preventive controls of entries.
It seems clear, including to the IMF, that controlling capital outflows might have been desirable in its loan to Argentina under former President Mauricio Macri. Without such controls, the IMF simply allowed international investors to take their money out of the country, leaving Argentina with US$44 billion in debt and little to show. In circumstances such as those faced by Argentina, the IMF should consider not only allowing controls on capital outflows, but also insisting that they be respected.
The IMF’s Articles of Agreement rightly give member state governments wide latitude in deploying capital controls, provided that such policies do not harm other countries in a beggar-thy-neighbour way. Rich countries have exploited this flexibility to the fullest. 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 and a member of the Independent Commission for the Reform of International Corporate Taxation. Jonathan D. Ostry, an incoming professor of practical economics at Georgetown University, is a former assistant director at the IMF and co-author of Taming the Tide of Capital Flow.© Project Syndicatewww.project-syndicate.org