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Four Points
New Economics of Capital Flows
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013non-FDIfinan
cialflows%GDP
CapitalFlowstoEmergingMarkets(1980to2013)
Mexico/LAC
Mexico II, AFC, Brazil, Argentina
GFC EURO
Financial Amplification Effects
AD +
Surge
ER appreciation
Credit expansion
Source: Korinek, Anton (2011), “The New Economics of Prudential Capital Controls: A Research Agenda,” IMF Economic Review, V 59, N3.
ER Depreciation
Balance sheet impact
Sudden Stop
AD -
-100,000
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20132014f2015f
MillionsofUSD
EmergingMarketCapitalFlows(1995to2015)
Source: IIF, 2014
Regulate inflows
Regulate Outflows
Restructure Debt?
Reregulation
Source: Gallagher, 2014
Country FirstGeneration SecondGeneration ThirdGeneration
(quantitativecontrols) (price-basedcontrols) (FXregulations)
Chinaoutrightbansorlimitsontheentryofcertain
investments
IndiaDirectlimitsonUSD-ruppe
trades
marginrequirementon
dollar-rupeeforwardtradeincreasedto100
percent
Braziltaxesonportfolio
investments
non-interestreserverequirementonbank's
shortdollarpositionsin
FXspotmarket
SouthKorea
witholdingtaxonnon-
residentholdingsoftreasury
andmonetarybonds
numerousrestrictions
onbank'sFX
derivativespositions
ThreeGenerationsofEMDCross-BorderFinancialRegulations
Perutaxesonportfolio
investments
positionlimitsonFX
shortdollartradesandreserverequirements
forallFXdeposits
Indonesiaonemonthholdingperiod
oncentralbankbills
Thailandtaxesonnon-resident
purchaseofpublicbonds
New Guidelines from IMF
Doing Less Harm: New IMF Guidelines
Capital Account Liberalization •Capital account liberalization should be done in a sequenced manner
Managing Capital Inflows •Allow the exchange rate to appreciate, accumulate reserves, tighten fiscal policy, increase capital requirements •Use capital flow management measures (CFMs)
CFMS on Capital Outflows • CFMs on capital outflows can be considered in crisis or near crisis conditions.
Multi-lateral Aspects of Managing Capital Flows •Nations on both ends of capital flows should be conscious of the multilateral aspects of their policies •Many trade and investment treaties are at odds with CFMs
“Capital flow management measures may constitute part of a broader approach to protect economies from shocks. In circumstances of high and volatile capital flows, capital flow management measures can complement and be employed alongside, rather than substitute for, appropriate monetary, exchange rate, foreign reserve management and prudential policies.” Source: G20 Coherent Conclusions for the Management of Capital Flows Drawing on Country Experiences
G-20 one step forward, two steps back
IMF “When dealing with macroeconomic or financial stability risks arising from large and volatile capital flows, macroeconomic policy adjustment could be supported by prudential measures and, as appropriate, capital flow management measures.”
--IMF communique, April 2013
Taper Tantrum
• Counter-cyclical regulations, diversify credit
• Coordinate regulation at ‘both ends’.
• Coherence at IMF and G-20.
• Policy space in trade and investment treaties.
TPP
$17.4
China BIT
$10.4 T 13% GDP
India BIT
$2.0 T, 3%
Global GDP = $77.6 T 56% on this page
$27.5 T, 40% of global GDP
ECONOMIC BENEFITS of TPP in 2025: 0.49 percent of GDP!
TTIP
$18.4 T 24%
$17.4 T 22%
80% GDP, all negotiations
Economic Benefits (2025) 0.30 to 0.89 percent of GDP!
Rebranding Financial Reform in Trade Treaties
WTO-GATS
• Covers only ‘financial services’
• Positive ‘list’
• Balance of Payments and Prudential safeguards
• State-to-State dispute settlement
US FTAs and BITS
• Covers all cross-border transfers and investment
• Negative ‘list’
• No BOP* safeguard and restricted Prudential exception
• Investor-state dispute settlement
CASES PENDING
• Abaclat and Others v. Argentine Republic
($1 billion)
• Postova banka v. Greece ($??)
• Marfin v. Cyprus
($1 billion)
ISSUES
• Jurisdiction
• National Treatment
• Expropriation
• Fair and equitable treatment
• Transfers
Sovereign Debt Restructuring
IMF on Treaties and Cross-border Regulations
“these agreements in many cases do not provide appropriate safeguards or proper sequencing of liberalization, and could thus benefit from reform to include these protections.”
International Monetary Fund (2012), Liberalizing Capital Flows and Managing Outflows, Washington, IMF. .
Lessons for Economic Policy
• Counter-cyclical regulations, diversify credit
• Policy space in trade and investment treaties.
• Regulation at ‘both ends’.
• China funds to the rescue?
