Regulating Global Capital Flows for Long-Run Development
Since the revival of global capital markets in the 1960s, cross-border capital flows have increased by orders of magnitude, so much so that international asset positions now outstrip global economic output. Most cross-border capital flows occur among industrialized nations, but emerging markets are increasing participants in the globalization of capital flows. While it is widely recognized that investment is an important ingredient for economic growth, and that capital flows may under certain conditions be a valuable supplement to domestic savings for financing such investment, there is a growing concern that certain capital flows (such as short-term debt) can have destabilizing effects in developing countries.
During the recent financial and currency crises a number of emerging market and developing countries experimented with a variety of measures that have traditionally been referred to as “capital controls”—defined as regulations on capital flows. Given that capital controls have been highly stigmatized, in this paper we will refer to them as capital account regulations (CARs). Those nations that deployed CARs in the years leading to the financial crisis were among the least hard hit when the global financial crisis wracked the world economy (Ostry et al. 2011).￼
The 2008 global financial crisis has opened a new chapter in the debate over the proper policy responses to pro-cyclical capital flows. Until very recently certain strands of the economics profession as well as industrialized country national governments and international financial institutions have remained either hostile or silent to regulating capital movements. Regardless, a number of emerging econo- mies, including Brazil, Taiwan, and South Korea, have been successfully experi- menting with CARs to manage volatile capital flows (Gallagher 2011; IMF 2011b). The International Monetary Fund (IMF) has come to partially recognize the appro- priateness of capital account regulations and has gone so far as to recommend (and officially endorse) a set of guidelines regarding the appropriate use of CARs.
In September 2011, the Global Economic Governance Initiative at Boston University’s Pardee Center for the Study of the Longer-Range Future—along with Columbia University’s Initiative for Policy Dialogue and Tufts University’s Global Development and Environment Institute—convened a Task Force on Regulating Global Capital Flows for Long-Run Development. Based on discussions among members, we argue that there is a clear rationale for capital account regulations in the post-crisis world, that the design and monitoring of such regulations is essential for their effectiveness, and that a limited amount of global and regional cooperation would be useful to ensure that CARs can form an effective part of the macroeconomic policy toolkit.
This report addresses these issues and provides a protocol for the use of CARs— one that stands in stark contrast to a set of guidelines for the use of capital con- trols endorsed by the board of the IMF in March 2011 (see IMF 2011b) but now superseded by a G-20 set of “coherent conclusions” on CARs in November 2011. Endorsed by the G-20 finance ministers and central bank governors in October, then endorsed by the G-20 leaders themselves in Cannes, the G-20’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.” This Task Force report will help policymakers and the IMF navigate their thinking under these newer G-20 recommendations.
About the Authors
José Antonio Ocampo
Professor of Professional Practice at Columbia University and former Minister of Finance of Colombia
Jose Antonio Ocampo is a Professor of Professional Practice in the School of International and Public Affairs and former Minister of Finance of Colombia. He is also a Fellow of the Committee on Global Thought at Columbia University. Prior to his appointment at Columbia, Professor Ocampo served as the United Nations Under-Secretary-General for Economic and Social Affairs, and head of UN Department of Economic and Social Affairs (DESA), as Executive Secretary of the UN Economic Commission for Latin America and the Caribbean (ECLAC), and has held a number of high-level posts in the Government of Colombia, including Minister of Finance and Public Credit, Director of the National Planning Department, and Minister of Agriculture . Professor Ocampo is author or editor of over 30 books and has published over 200 scholarly articles on macroeconomic theory and policy, international financial issues, economic development, international trade, and Colombian and Latin American economic history.
Financial Markets Program Director
Initiative for Policy Dialogue (IPD)
Stephany Griffith-Jones is an economist specialising in international finance and development, with emphasis on reform of the international and national financial system, especially in relation to financial regulation and global governance. She is Financial Markets Director at the Initiative for Policy Dialogue, Columbia University. Previously she was Professorial Fellow at the Institute of Development Studies at Sussex University. She was Director of International Finance at the Commonwealth Secretariat and worked at UN DESA and ECLAC. She was senior consultant to governments in Eastern Europe, Latin America and Africa and many international agencies, including the World Bank, the IADB, the European Commission, UNDP and UNCTAD. She was a member of the Warwick Commission on financial regulation. She currently is theme leader on finance in the ESRC /DFID growth programme for LICs, especially African ones. She has published over 20 books and many scholarly and journalistic articles. Her books include Time for the Visible Hand, Lessons from the 2008 crisis, edited jointly with José Antonio Ocampo and Joseph Stiglitz.
Kevin P. Gallagher
Professor of Global Development Policy
Global Development Policy Center
Dr. Kevin P. Gallagher is an associate professor of international relations at Boston University, and senior researcher at the Global Development and Environment Institute at Tufts University. He specializes in global economic and development policy, with an emphasis on Latin America.
Professor Gallagher is the author of The Dragon in the Room: China and the Future of Latin American Industrialization (with Roberto Porzecanski), The Enclave Economy: Foreign Investment and Sustainable Development in Mexico's Silicon Valley (with Lyuba Zarsky), and Free Trade and the Environment: Mexico, NAFTA, and Beyond. He writes a monthly column on globalization and development for the The Guardian (UK) newspaper.
Professor Gallagher is also a research fellow at Boston University’s Frederick S. Pardee Center for the Study of the Longer-Range Future where he directs the Global Economic Governance Initiative. In 2010 he served on the US Department of State’s investment subcommittee of the Advisory Committee on International Economic Policy.
Amar Bhattacharya has been director of the G-24 Secretariat since 2007. Before, he was senior advisor for Poverty Reduction and Economic Management Network at the World Bank, where he was responsible for coordinating the Bank’s work on international financial architecture. Since joining the World Bank in 1979, he has had a long-standing involvement in East Asia, including as division chief for country operations in Indonesia, Papua New Guinea and the South Pacific. Prior to joining the World Bank, he worked as an international economist with the First National Bank of Chicago.
Professor of International Political Economy
Department of Political Science
Dr. Bylth is Professor of International Political Economy in the Department of Political Science at Brown University and a Faculty Fellow at Brown's Watson Institute for International Studies. He grew up in Dundee, Scotland. He received his PhD in political science from Columbia University in 1999 and taught at the Johns Hopkins University from 1997 until 2009.
His research interests lie in the of field international political economy. More specifically, his research transcends several fields and aims to be as interdisciplinary as possible, drawing from political science, economics, sociology, complexity theory and evolutionary theory. His work generally falls into several related areas: the politics of ideas, how institutions (and disciplines) change, political parties, and the politics of finance.
State University of Rio de Janeiro
Professor of Economics
University of Massachusetts, Amherst
Professor of Global Finance
University of Denver
Rafiq Hariri Professor of International Political Economy
John F. Kennedy School of Government
Senior Economic Affairs Officer
Shari Spiegel joined UN DESA as a Senior Economic Affairs Officer in May 2010. She is co-author and co-editor of several of books and articles on capital and financial markets, debt and macroeconomics. She served as Executive Director of the Initiative for Policy Dialogue (IPD). She has extensive experience at the private sector, most recently as a Principal at New Holland Capital and as head of fixed-income emerging markets at Lazard Asset Management. She also served as an advisor to the Hungarian Central Bank in the early 1990s.
Peterson Institute for International Economics
Graduate School of Economics
Deputy Director, Research Section of International Finance
Institute of World Economics and Politics
Chinese Academy of Social Science