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Wednesday, December 7, 2016
- Economists and development experts are applauding a new policy by the International Monetary Fund supporting government attempts to control the cross-border flow of money, a major ideological shift for the institution.
Still, certain critics, including voices within the IMF itself, are warning that the change does not go far enough.
A major new “institutional view” released publicly this week, the result of three years of rethinking, admits that “capital flows … carry risks, which can be magnified by gaps in countries’ financial and institutional infrastructure”. It also notes that those risks, related more broadly to economic liberalisation of the type pushed by the IMF, are particularly present for countries that have not “reached certain levels … of financial and institutional development”.
In this, the Washington-based IMF has formally begun coming to terms with the fact that full market liberalisation will not always promote economic growth, and in fact can prove disastrous in certain situations.
Fragile economies can be injured by both sudden influxes and sudden outflows of money – the “bubbles” that have been repeatedly discussed in recent years. Hence, the desire by many economists and government officials to institute certain restrictions on those capital flows.
These can include a spectrum of tools, such as certain types of taxes, limits on how much of a national asset can be sold internationally, or requirements on how long foreign investments need to stay in a country.
For years, however, the IMF has held a rigid line, demanding, uniformly, that such controls only be used as tools of “last resort”, essentially pushing for markets to regulate themselves. In this, the Fund was backed particularly by the U.S., which has some of the most open markets in the world – and is home to some of the most active international companies.
Such an approach was firmly in line with the so-called Washington Consensus that has defined the global financial framework for the past half-century. As yet, U.S. treaties, as under the World Trade Organisation, still routinely demand rolling back capital controls.
But institutional thinking on the issue has been changing for more than a decade now, instigated particularly by the meltdown of several Asian economies during the late 1990s. The current international economic crisis, which has little spared those countries that have followed IMF diktat, has now motivated the Fund to crystallise this new institutional approach.
Following recent IMF board approval, Fund officials will now be able to suggest to countries that they put reins on their processes of economic liberalisation. For those countries with pre-existing IMF agreements that would prohibit such actions, the Fund is suggesting renegotiating these treaties.
“The financial crisis highlighted the risks of capital flows, especially in environments where financial regulation and supervision had not kept pace with the ability to manage the risks of large capital flows,” Vivek Arora, assistant director in the Fund’s strategy, policy, and review department, told journalists from the IMF headquarters in Washington.
“While previously we thought of the risks of capital flows being largely associated with countries that were newly liberalising, it became clear, from the financial crisis, that even countries that have long benefitted from capital flows, which are quite sophisticated at managing them, can also be vulnerable to financial risks.”
Still, the new “institutional view” does not move nearly as far as some would like, with IMF policy continuing to emphasise that capital controls should be “generally temporary”.
According to an analysis e-mailed to IPS by Bhumika Muchhala, coordinator of the Finance Development Programme with the Third World Network, there have been significant disagreements between some developing countries and the United States, European Union and others, resulting in repeated rescheduling of votes on the new policy.
“Brazil and India were both opposed to the paper, while other developing countries, including China, accepted the final compromise,” Muchhala writes. “It’s noteworthy that the media spin is on the Fund ‘dropping opposition’ to capital controls, (which is) definitely a platform for civil society to keep dismantling anti-regulation ideology.”
The IMF executive director for Brazil and 10 other countries, Paulo Nogueira Batista, Jr., has been outspoken in his criticism of the new policy, warning that although the new paper shows “some progress”, it still “suffers from a lack of balance”.
“The IMF is eager to adopt a prescriptive approach and to advise countries on how to liberalize and manage capital flows. However, the institution’s track-record in this area is far from stellar,” Batista warns in an e-mailed statement, speaking in his own capacity.
“Many studies do not find a positive relationship between capital account liberalization and economic growth. This is not completely reflected in the Fund’s ‘institutional view’. The prominence given to capital flow liberalization is symptomatic of the pro-liberalization bias that still prevails in the IMF.”
Batista says that, instead, the IMF should now be in a “learning mode … listening more to policy makers and financial sector practitioners who are often better placed to understand capital flows.”
Washington Consensus lives
The IMF represents only the tip of an ideological movement that has been ascendant for decades.
“For 30 years, students of economics who meant well were taught only free market ideology, while countervailing perspectives were trashed,” Rick Rowden, a development consultant currently based in Delhi, told IPS. “It would be interesting to see whether the free market think tanks, university departments and corporate media have also now reconsidered their positions, as the IMF has done.”
While Rowden, too, welcomes the new IMF positioning, he cautions against thinking that any major ideological shift is underway at the Fund.
“Arguably more important is to ask if the IMF will similarly relent on its manic obsession with keeping inflation extremely low in developing countries,” he says.
“Is the IMF now also suddenly in favour of trade protection and subsidy support for building domestic industries? Are they suggesting developing countries actually should ‘discriminate’ and against foreign investors and tilting the playing field in favour of building up domestic firms? I think not.”
He continues: “While the IMF’s about-face on capital controls is promising, the oft-cited pronouncements of the death of the Washington Consensus are quite premature.”