The IMF and capital controls

You can just tell that this is going to get twisted.

The report said: \”Despite their beneficial effects, capital inflow surges can pose challenges to receiving economies… surges of capital inflows can complicate macroeconomic management as the real economy may not be able to adapt to large swings in the exchange rate.

They can fuel a boom in domestic demand leading to overheating and a combination of accelerating inflation and a widening current account deficit through the appreciation of the real exchange rate. They may also lead to asset price bubbles and increase systemic risk in the financial sector, even sometimes in the case of a generally effective prudential supervisory and regulatory system.

\”When the available policy options and prudential measures do not appear to be sufficient or cannot provide a timely response to an abrupt or large increase in capital inflows, capital controls may be a useful element in the policy toolkit.\”

What they\’re saying is that walls of hot money, looking purely for portfolio investment, can cause problems, Thus controls on such walls of hot money might, sometimes, be a good idea.

This is immediately going to be used as support for controls on foreign direct investment (a very different beast indeed) which isn\’t what they mean at all. I confidently expect we\’ll get this from John Hilary at Action Aid, Ritchie with his beloved Green New Deal (which advocates capital controls) and so on.

Look, look, the IMF says economies should be autarkic! When, of course, they say no such thing. This is about huge flows of short term money going into particular markets, not about investment in physical assets and production. But that\’s the way they\’ll play it.

5 thoughts on “The IMF and capital controls”

  1. This is one of those strange posts in which (on the basis of an AEP story!) tell us what you think other people’s reaction to something would be.

    It might be more illuminating if you tell us what you reaction to this is (if true) – do youthink the IMF have gone bonkers? Speculators reduce volatility, after all.

  2. The book I read on this a while back divided FDI into greenfield (building a new factory) and brownfield (buying an already existing factory). I think the argument being that the brownfield variety of foreign direct investment though not without it’s benefits could be seen as portfolio investment in disguise. The argument following on from that being that it is worth governments at least keeping a cursory glance on flows from forewign direct investment and retaining the right to say no.

    Incidentally I’ve put together a rather belated response to one of your earlier posts on protectionism here, feel free to moke, point out holes etc.

  3. Would ‘ve thought outside purchase of land and property could be pretty destabilising / inflationary (since you exclude physical assets.)
    Keynes favoured import controls (though the international buffer stocks scheme was a good idea.)

  4. Pingback: That new IMF report… « Left Outside

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