© The Financial Times Ltd 2015 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
Last updated: December 3, 2012 4:00 pm
The International Monetary Fund has cemented a substantial ideological shift by accepting the use of direct controls to calm volatile cross-border capital flows, as employed by emerging market countries in recent years.
Although the fund continued to warn that such controls should be “targeted, transparent, and generally temporary”, the policy, announced in a staff paper released on Monday, is a sharp change from the fund’s enthusiasm for liberalising capital accounts during the 1990s.
Economies including Brazil – which has fiercely criticised super-loose US monetary policy for fuelling speculative inflows to its asset markets – Thailand and South Korea have experimented with taxes, regulations and other restrictions on capital. The Brazilian representative at the IMF said on Monday that the fund was still too cautious and regarded capital controls as a last resort rather than a standard part of the policy toolkit.
The fund paper said that while the free movement of capital was generally beneficial, it could destabilise economies whose financial systems were insufficiently developed.
“Liberalisation needs to be well planned, timed, and sequenced in order to ensure that its benefits outweigh the costs,” the study said. “There is . . . no presumption that full liberalisation is an appropriate goal for all countries at all times.”
The IMF continued to argue that direct capital controls were not a substitute for macroeconomic responses to rapid inflows, including tightening fiscal policy, cutting interest rates and letting the exchange rate rise.
Paulo Nogueira Batista, who represents Brazil and 10 other countries on the fund’s executive board, said the staff paper still retained a “pro-liberalisation bias” and underplayed the role of rich countries in fuelling volatile flows.
Brazil, whose finance minister, Guido Mantega, has repeatedly warned of a “currency war”, has sharply criticised the US Federal Reserve for holding interest rates near zero, which he said encouraged investors to borrow cheaply in dollars and chase high returns in emerging markets.
In a response to the staff view, published on Monday in a personal capacity, Mr Nogueira Batista said: “Despite some progress compared to its previous work, the IMF has failed to deliver convincing results”.
The experiences of Iceland, Spain, Ireland and central and eastern European countries showed the dangers of large and volatile capital movements.
“The ongoing crisis has yet to have a full impact on the way the IMF considers capital flows,” Mr Nogueira Batista said. “The extent of the damage that large and volatile capital flows can cause to recipient countries has not been sufficiently recognised”.
During the 1990s, under pressure from the US Treasury, the IMF management proposed changing the institution’s rules to promote capital account liberalisation. The drive was abandoned after the Asian financial crisis stiffened opposition among emerging market countries.
In 1998, Malaysia imposed controls on capital outflows, a decision that the fund opposed at the time but which at least one IMF managing director, Horst Köhler, subsequently said was the right decision.
The IMF study said it was preferable to control inflows rather than outflows, and to treat domestic and foreign investors equally by using measures such as banking supervision rather than restricting capital movements based on residency. But Mr Nogueira Batista said considerable evidence showed non-resident investors behaved in a systematically different way to residents.
IMF officials say that while the eurozone experience shows the dangers of allowing free flows of capital with an insufficiently well-regulated financial system, the solution is to improve prudential controls and move towards banking and fiscal union rather than to limit cross-border movements of money.
Please don't cut articles from FT.com and redistribute by email or post to the web.
Sign up for email briefings to stay up to date on topics you are interested in