Regulating Global Capital Flows for Long-Run Development

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of guidelines for the use of capital con- trols endorsed by the board of the IMF in March 2011 (see IMF 2011b) but now superseded by a G-20 set of “coherent conclusions” on CARs in November 2011.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.