Monday, July 30, 2012
Kevin Gallagher on capital controls
Another interesting talk at the Central Bank of Argentina, this one by Kevin Gallagher from the University of Boston based to a great extent on his recent work with José Antonio Ocampo and Stephany Griffith-Jones on the regulation of capital flows (see here).
He has three main points to make. First, there is increasing and overwhelming evidence that there is no connection between capital account liberalization and economic growth. He cited the recent work by Arvind Subramanian, Olivier Jeanne and John Williamson (the latter of Washington Consensus fame) at the Peterson Institute, called "Who Needs to Open the Capital Account?," who argue (2012, p. 5) that "the international community should not seek to promote totally free trade in assets -- even over the long run-- because ... free capital mobility seems to have little benefit in terms of long run growth."
Second, it seems that the International Monetary Fund (IMF) has come to partially recognize the appropriateness of capital account regulations and has gone so far as to recommend (and officially endorse) a set of guidelines regarding the appropriate use of Capital Account Regulations (CARs), the new term for capital controls within the IMF. He warned, correctly I think, that changes within the IMF can be seen as a reform that tries to restrict the use of capital account regulations to emergencies, and situations approved by the IMF within article 4 consultations, when article 6 guarantees that countries can use them freely.
Finally, and more importantly, Kevin warned that Bilateral Investment Treaties (BITs) and Free Trade Agreements (FTAs) have regularly included very restrictive language on capital account regulations, and have a tendency to restrict the policy space in developing countries, exactly when a consensus that this restrictions do not provide any benefit in terms of growth.