Ha-Joon Chang Bids Capital Controls Farewell

♠ Posted by Emmanuel in ,, at 10/27/2010 12:02:00 AM
And so the death knell for Washington Consensus-style policies tolls even louder. While it's certainly debatable whether the excesses of liberalization, deregulation, and privatization helped bring about the current US-led subprime globalization mess, there are undeniable signs that laissez-faire has had its day as Gordon Brown once said. First, the architect of many such efforts stateside, the archetypal ugly American Larry Summers, is soon to exit the White House. Whether he went or was pushed is quite immaterial; the bigger point is that no one seems to be lamenting his demise. Second, current IMF leadership embodied by Dominique Strauss-Kahn is not so fond either of the Asian crisis-era Washington Consensus. Third, the IMF is even warming up to the use of capital controls--albeit in specific situations--which it once thought of as the work of the devil.

Welcome to the brave new world, then. As always, that champion of heterodox economics, Ha-Joon Chang, is heralding the demise of these once-fearsome policy prescriptions used to open up developing countries to the will of global capital (or something like that). Here he is together with Ilene Grabel of the University of Denver on why FDI still goes on irrespective of capital controls being implemented:
Was it really just a decade ago that the International Monetary Fund and investors howled when Malaysia imposed capital controls in response to the then looming Asian financial crisis? We ask because suddenly those times seem so distant. Today, the IMF is not just sitting on its hands as country after country resurrects capital controls, but is actually going so far as to promote their use [see third point above]. What about the investors whose freedoms are eclipsed by the new controls? Well, their enthusiasm for foreign lending and investing has not been damped in the least. So what is going on here? In our view, nothing short of the most significant transformation in global financial management of the past 30 years.

Like most transformations, this reform has been gradual. Reform in the IMF view of capital controls actually began soon after the Asian crisis, as countries such as Chile, China and India imposed controls. Most analysts found that these controls were beneficial in key respects. This success led the IMF to soften its hardline stance: it admitted that controls might be tolerable in exceptional cases provided that they were temporary, market friendly and focused strictly on capital inflows. That said, policymakers adopted capital controls at their peril – not least risking condemnation by the Fund and by credit rating agencies, and punishment by international investors.

What was just a trickle of controls before the current crisis is now a flood. Iceland led the way in 2008 as it grappled with its financial implosion. Soon after, a parade of developing countries took action: some strengthened existing controls while others introduced new measures that targeted inflows and outflows. For example, during the crisis China augmented its extensive array of controls, while Indonesia, Taiwan, Peru, Argentina, Ecuador, Ukraine, Russia and Venezuela also introduced controls of one sort or another. In October 2010 alone: Brazil twice raised its tax on foreign investment in fixed-income bonds while leaving foreign direct investment untaxed; Thailand introduced a 15 per cent withholding tax on capital gains and interest payments on foreign holdings of government and state-owned company bonds; and South Korean regulators have begun to audit lenders utilising foreign currency derivatives.

The IMF did not drive this process of reform, but its staff have adjusted their thinking quickly in response to the exigencies of the crisis. One of these is the unforeseen currency appreciation in many developing countries that is a consequence of capital flight from the dismal returns now on offer in wealthy countries [pace "international currency war"]. Many recent Fund reports make clear that capital controls are a legitimate part of the policy toolkit. Dominique Strauss-Kahn, the IMF’s managing director, said as much in his recent speech in Shanghai, while the director of the Fund’s western hemispheric department made a case (unsuccessfully) for the use of controls in Colombia in response to the rapid appreciation of its currency. Not your grandfather’s IMF, to be sure...

What was forgotten during the neo-liberal era is that many of these explicitly “anti-market” measures helped to promote rapid economic development by increasing financial stability. This is not to say that all controls were successful or that all measures taken to enforce them were appropriate. But that should not distract us from acknowledging their tremendous contributions to unprecedented economic growth and stability during the period.

Those of us who have long advocated systematic financial reform look at current developments with excitement. Countries need the latitude to impose capital controls that meet their particular needs, and it is a relief to see that they are finally getting it after a long period of debilitating neoliberal ideology.
Though I have my differences with Ha-Joon Chang, I certainly believe capital controls can and should be a matter of national policy space instead of being forbidden by IMF diktat, AKA conditionalities.