Friday, June 01, 2012

Regulating capital flows: the IMF takes a historic step

From the FT blogs here. Some elements:
"This month the International Monetary Fund (IMF) can make history. The IMF is set to officially change its view on the regulation of cross-border finance. Preliminary work released by the IMF exhibits diligent research and deep soul searching, but falls short of being a comprehensive view on how and when to regulate capital flows. There is still time for the IMF to further sharpen its view.
. . .
Based on the series of papers on the issue, the institution that pushed for global de-regulation of cross-border finance in the 1990s now says that: capital account liberalization is more of a long-run goal and is not for every country at all times; capital controls –which they re-term “capital flow management measures” to take away the stigma– on inflows (on a temporary basis and alongside other measures such as capital requirements and reserve accumulation) are permissible en route to liberalization; regulations on capital outflows are even permissible in or near financial crises. Moreover, they note that certain trade and investment treaties “do not provide appropriate safeguards” to allow for capital account regulations.

While the IMF should be applauded for taking a hard look at its view on regulating cross-border finance, we think further revision is needed in order for the Fund to have a policy that will truly be useful for nations to prevent and mitigate financial crises."
and you can find out more about this world-changing subject, putting it in a tax haven context, here, in Treasure Islands. An excerpt:
"The quarter-century that followed from around 1949, in which Keynes’ ideas were widely implemented, is now known as the golden age of capitalism, an era of widespread, fast-rising and relatively un- troubled prosperity. It was memorably summarised by British Prime Minister Harold Macmillan, who noted in 1957 that ‘most of our people have never had it so good’. From 1950 to 1973 annual growth rates amid widespread capital controls (and extremely high tax rates) averaged 4.0 per cent in America and 4.6 percent in Europe.

It was not just rich countries that enjoyed steady, rapid growth: as the Cambridge economist Ha-Joon Chang notes, the per capita income of developing countries grew by a full 3.0 per cent per year in the 1960s and 1970s, amid widespread capital controls – far faster than the rate since then. In the 1980s, as capital controls were progressively relaxed around the world and as tax rates fell and the offshore system really began to flower, growth rates fell sharply. ‘Financial globalisation has not generated increased investment or higher growth in emerging markets,’ top-ranking economists Arvind Subramanian and Dani Rodrik explained in 2008. ‘Countries that have grown most rapidly have been those that rely least on capital inflows.’ "
Treasure Islands describes the international cooperative system that underlay this high-growth, financially-constrained era 'the opposite of offshore' - and it is refreshing to see the IMF taking tentative steps back in this direction.

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