Capital control
Types of capital control include exchange controls that prevent or limit the buying and selling of a national currency at the market rate, caps on the allowed volume for the international sale or purchase of various financial assets, transaction taxes such as the proposed Tobin tax on currency exchanges, minimum stay requirements, requirements for mandatory approval, or even limits on the amount of money a private citizen is allowed to remove from the country.
[9] More widespread use of capital controls raises a host of multilateral coordination issues, as enunciated for example by the G-20, echoing the concerns voiced by John Maynard Keynes and Harry Dexter White more than six decades ago.
[10] Prior to the 19th century, there was generally little need for capital controls due to low levels of international trade and financial integration.
Economic historian Barry Eichengreen has implied that the use of capital controls peaked during World War II, but the more general view is that the most wide-ranging implementation occurred after Bretton Woods.
This essentially meant that currencies were to be freely convertible for the purposes of international trade in goods and services but not for capital account transactions.
[22] The other leading architect of Bretton Woods, the American Harry Dexter White, and his boss Henry Morgenthau, were somewhat less radical than Keynes but still agreed on the need for permanent capital controls.
In his closing address to the Bretton Woods conference, Morgenthau spoke of how the measures adopted would drive "the usurious money lenders from the temple of international finance".
[19] Following the Keynesian Revolution, the first two decades after World War II saw little argument against capital controls from economists, though an exception was Milton Friedman.
[21] Eric Helleiner posits that heavy lobbying from Wall Street bankers was a factor in persuading American authorities not to subject the Eurodollar market to capital controls.
[25] In their book This Time Is Different (2009), economists Carmen Reinhart and Kenneth Rogoff suggest that the use of capital controls in this period, even more than its rapid economic growth, was responsible for the very low level of banking crises that occurred in the Bretton Woods era.
[27] By the late 1970s, as part of the displacement of Keynesianism in favour of free-market orientated policies and theories, and the shift from the social-liberal paradigm to neoliberalism countries began abolishing their capital controls, starting between 1973 and 1974 with the US, Canada, Germany, and Switzerland, and followed by the United Kingdom in 1979.
Asian nations that had retained their capital controls such as India and China could credit them for allowing them to escape the crisis relatively unscathed.
Several emerging market economies responded to these concerns by adopting capital controls or macroprudential measures; Brazil imposed a tax on the purchase of financial assets by foreigners and Taiwan restricted overseas investors from buying time deposits.
[39] Pro-capital control statements by various prominent economists, together with an influential staff position note prepared by IMF economists in February 2010 (Jonathan D. Ostry et al., 2010), and a follow-up note prepared in April 2011,[5] have been hailed as an "end of an era" that eventually led to a change in the IMF's long held position that capital controls should be used only in extremis, as a last resort, and on a temporary basis.
[54] There was strong counter lobbying by business and so far the US administration has not acted on the call, although some figures such as Treasury secretary Tim Geithner have spoken out in support of capital controls at least in certain circumstances.
In December 2011, China partially loosened its controls on inbound capital flows, which the Financial Times described as reflecting an ongoing desire by Chinese authorities for further liberalization.
[62] In September 2012, Michael W. Klein of Tufts University challenged the emergent consensus that short-term capital controls can be beneficial, publishing a preliminary study that found the measures used by countries like Brazil had been ineffective (at least up to 2010).
[63] In the same month, Ila Patnaik and Ajay Shah of the NIPFP published an article about the permanent and comprehensive capital controls in India, which seem to have been ineffective in achieving the goals of macroeconomic policy.
[66][67] An IMF staff discussion note (Jonathan D. Ostry et al., 2012) explores the multilateral consequences of capital controls, and the desirability of international cooperation to achieve globally efficient outcomes.
The paper posits that if capital controls are justified from a national standpoint (in terms of reducing domestic distortions), then under a range of circumstances they should be pursued even if they give rise to cross-border spillovers.
Coordination may require borrowers to reduce inflow controls or an agreement with lenders to partially internalize the risks from excessively large or risky outflows.
[15] In the First Age of Globalization, governments largely chose to pursue a stable exchange rate while allowing freedom of movement for capital.
In the Bretton Woods period, governments were free to have both generally stable exchange rates and independent monetary policies at the price of capital controls.
In the Washington Consensus period, advanced economies generally chose to allow freedom of capital and to continue maintaining an independent monetary policy while accepting a floating or semi-floating exchange rate.
The prudence requirement says that such regulation should curb and manage the excessive risk accumulation process with cautious forethought to prevent an emerging financial crisis and economic collapse.
Many economists agree that lifting capital controls while inflationary pressures persist, the country is in debt, and foreign currency reserves are low, will not be beneficial.
