The G 20 s Helpful Silence on Capital Controls

It can hold the fort because it maintains one of the world s strictest regimes of exchange and capital controls. Unlike many Latin American and former Soviet bloc countries, where similar controls are honored mainly in the breach, violating capital controls in China is virtually a capital offense.

The fourth option is to impose capital controls on inflows (or liberalize controls on outflows). Leaving aside the issue of whether or not such controls are leaky, evidence suggests that controls on inflows of short term hot money do not affect the overall amount of capital inflows. Thus, such controls are ineffective in reducing short term cyclical pressure on the currency to appreciate.

Thus, the IMF s recommendation to use capital controls only after exhausting interest rate adjustment, reserve accumulation, and prudential regulation is out of step with the profession. Indeed, recent work in economic theory shows that capital controls can actually be the optimal policy choice.

Will the government liberalize interest rates or loosen capital controls? How will the fiscal system be revamped?

Indeed, recent work in economic theory shows that capital controls can actually be the optimal policy choice. For example, the new welfare economics of capital controls views unstable capital flows as negative externalities on recipient countries, which implies that regulations on cross border flows are the optimal tools to address market failures, improve market functioning, and enhance growth, not worsen it.

Capital account liberalization and renminbi internationalization invite potentially volatile cross border capital flows, which could, for example, trigger rapid currency appreciation. Given this, China can be expected to continue to manage capital account transactions to some extent, using macroprudential measures and, when appropriate, direct capital controls.

So here we are with yet another twist in the never ending saga of our love hate relationship with capital controls.

Yet imposing capital controls on inflows is difficult and sometimes leaky. Macroprudential controls on credit growth are useful, but sometimes ineffective in stopping asset bubbles when low interest rates continue to underpin generous liquidity conditions.

Most economists in China seem to support the PBOC s stance, citing the potential benefits of capital account liberalization. But Chinese policymakers should also recognize the significant risks inherent in relaxing capital controls.

If China eases restrictions on cross border capital flows, an unexpected shock could trigger large scale capital flight, bringing down the entire financial system. Given this, it is vital that China maintains controls over short term cross border capital flows in the foreseeable future.

Indeed, the IMF s own research shows that countries that deployed capital controls first or alongside a host of other macroprudential measures were among the most resilient during the global financial crisis. In many cases, the controls were neither market based nor temporary.

Given that the People s Bank of China (PBOC) has largely maintained its monetary policy independence over the last three decades, and actively manages the renminbi s exchange rate, it is natural to conclude that China imposes strict controls on capital flows. In fact, China liberalized inward foreign direct investment more than 20 years ago, and eased controls for much of the capital account thereafter.

As such, the timing could not be worse to float the idea of speeding up capital account liberalization. On the contrary, the Peoples Bank of China (PBoC) and other relevant authorities should consider capital controls, market suspensions, and emergency liquidity provision.

A wide range of official measures could be employed to support domestic demand while protecting medium term fiscal sustainability. And, to address volatile capital flows, countries should increase exchange rate flexibility, maintain adequate international reserves, and implement carefully designed capital controls.

Second, caution has costs financial openness may itself catalyze improvements in fundamentals that enhance the benefits of globalization. Capital controls, whatever their benefits in terms of mitigating the risks associated with volatile capital flows, are costly in a variety of ways.

To support this effort, China s government should loosen its grip on the exchange rate, while maintaining appropriate capital controls. Renminbi internationalization should not be a policy priority.

Certainly, China s capital controls, though porous, increase the transaction costs of moving short term capital to and from China, thereby reducing upward pressure on the renminbi s exchange rate in extreme circumstances, this could play a decisive role in China s financial security. But capital continues to flow if not entirely freely across China s borders.

Hopes were high early this year, when the State Council announced a strategy aimed at liberalizing the capital account, establishing a more flexible exchange rate policy, and opening the financial sector to domestic private capital. But the government then heeded influential economists warnings of the risks of relaxing capital controls too hastily.

Nonetheless, though predictions that China would abandon its exchange rate controls in order to uphold monetary autonomy have proved wrong over the last decade, this time may be different. With China s liberalization of interest rates and short term capital flows making it increasingly difficult for the country to juggle Mundell s irreconcilable trinity, one hopes that Chinese leaders will finally allow the renminbi to float, while keeping in place existing capital controls.

CAMBRIDGE It s official. The International Monetary Fund has put its stamp of approval on capital controls, thereby legitimizing the use of taxes and other restrictions on cross border financial flows.

But, over the past fifty years, when many other countries, including France and Italy, implemented draconian controls, the result was always the same eventually, the private sector adapted and eroded the controls effectiveness. Whether by misreporting imports and exports or exploiting corrupt government officials (which China has in ample supply), private capital eventually starts finding its way around the controls if the incentives are strong enough.

China moved to current account convertibility in 1996, but retained a substantial number of controls on capital movements, which have served as a shield against financial contagion. Are these still needed?

But the turbulence of the interwar period convinced many most famously John Maynard Keynes that an open capital account is incompatible with macroeconomic stability. 160 The new consensus was reflected in the Bretton Woods agreement of 1944, which enshrined capital controls in the IMF s Articles of Agreement.

Institutional challenges such as capital controls, regulatory burden, problems in accessing foreign exchange and the lack of institutional infrastructure for OFDI support services are factors that have restricted developing country firms' internationalization.

Under the classical Gold Standard that prevailed until 1914, free capital mobility had been sacrosanct. But the turbulence of the interwar period convinced many most famously John Maynard Keynes that an open capital account is incompatible with macroeconomic stability. The new consensus was reflected in the Bretton Woods agreement of 1944, which enshrined capital controls in the IMF s Articles of Agreement.

Second, the Greek government is driving up the costs of Plan B for the other side, by allowing capital flight by its citizens. If it so chose, the government could contain this trend with a more conciliatory approach, or stop it outright with the introduction of capital controls.

In Europe, too, capital controls would be the only way to avoid the offshoring of financial settlements after the currency conversion and the freezing of bank deposits. At any rate, experience indicates that exiting the euro while preserving the freedom of capital movements is little more than a fantasy.

Internal controls

Border Controls

In a September 2003 speech in Kuala Lumpur, then Managing Director Horst Köhler conceded that temporary capital controls can provide relief against volatile inflows from the rest of the world. He was presumably acknowledging that the Fund had it wrong when it criticized Malaysia for imposing such controls at the height of the Asian crisis.

What grabbed headlines was that the IMF now believes that countries could even use capital controls, renamed capital flow management measures, if implemented alongside monetary and fiscal measures, accumulation of foreign exchange reserves, and macroprudential financial regulations. Even under such circumstances, CFMMs should generally not discriminate on the basis of currency.

Capital controls enabled China to emerge from the Asian financial crisis of 1997 1998 largely unscathed, even though its financial system was at least as fragile as those of the affected countries. The Asian financial crisis persuaded China s leaders to shelve plans, launched in 1994, to liberalize the capital account.

A third reason to go slow on easing capital controls is that China s economic reforms remain incomplete, with property rights not yet clearly defined. Amid ambiguity over ownership and pervasive corruption, the free flow of capital across borders would encourage money laundering and asset stripping, which would incite social tension.

If the eurozone does not want to embrace capital controls, it has only two alternatives make the local printing of money more difficult, or offer investment guarantees in countries that markets view as insecure.

Ubuntu Studio Controls

Arms trafficking controls

Other regulatory controls

Export Controls Assistance

Even the International Monetary Fund, long the embodiment of the Washington Consensus, has acknowledged that capital controls are a legitimate part of the toolkit to manage capital flows in certain circumstances. American Congressmen view the Chinese as archetypal currency manipulators, but the Swiss have introduced a firm cap on the franc s appreciation.

Grexit would require capital controls and financial isolation, at least for some time. The resulting uncertainty about policies and prices might produce a severe adverse shock on the real economy, sending unemployment to even greater heights.

Rives controls the Internet

The controls work wonderfully.

Export Controls Legal Regime

Policymakers in advanced and emerging countries alike should focus on the underlying failures that destabilize their economies and impede growth, rather than trying to treat the symptoms by manipulating monetary policy or capital controls. Unless they are supported by strong institutional structures at all levels, such measures will prove futile in managing capital flows.