Daniela Prates, Barbara Fritz

Beyond the new IMF institutional view on capital account management: a broad approach on financial regulation in emerging economies

18 Seiten · 3,15 EUR
(Juni 2016)

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Introduction:

Since 2008, the global economy has been marked by financial turmoil and sharp recessions in the main advanced economies, while most emerging economies and some developing countries have been faring much better in financial and economic terms.

Within this context, a new boom in capital flows to emerging economies has surged. This new boom – the fourth in the post-Bretton Woods era – has been driven by the post-crisis circumstances. After a brief interruption in the fourth quarter of 2008 and early 2009, capital inflows returned to these economies, chasing yields in the setting of abundant liquidity and lower interest rates in advanced economies as a consequence of the countercyclical monetary policies launched in response to the crisis. These inflows lost momentum especially since the Federal Reserve (Fed) announced its intent to exit the so-called quantitative easing (QE) in the second quarter of 2013. Yet, as growth in advanced economies is expected to be rather weak in the coming years, due to unresolved legacies of their financial crises, emerging markets most probably will continue to be challenged by high and highly volatile capital inflows.

During this recent boom period, many governments have become increasingly concerned about the downsides of such inflows. They perceive dependence on highly volatile capital flows as a threat not only to short-term financial stability but also, more generally, to their domestic policy space. The debate about capital controls, long discarded as anachronistic has returned to the political and scholarly agenda with a vengeance. Even the IMF (International Monetary Fund), long hostile to any kind of capital control regime, has engaged in a new debate on capital flow management, seeking to establish a set of rules for all countries. However, this debate finds the international financial institutions ill prepared, as well as much of academia. As Rodrik (2010, 2) states: „We currently do not know much about designing capital control regimes. The taboo that has [been] attached to capital controls has discouraged practical, policy-oriented work that would help to manage capital flows directly.“

Here, Jan Priewe has been one of the few economists to address this issue before it gained more prominence in recent years. Based on a broad, yet unpublished study for the German Ministry for Cooperation and Development realized as early as 2005, which provided an analysis of capital controls applied in a series of countries especially during the 1990s, Priewe presented a highly critical perspective on financial opening (Priewe 2008).

This chapter follows this line and seeks to contribute to this discussion by critically reviewing the new IMF framework for capital account management, and by presenting an alternative approach to financial regulation in emerging economies in the current setting of financial globalization. Indeed, the global crisis has brought about significant rethinking, especially in terms of financial re-regulation and supervision at the domestic level. There is a growing consensus regarding the need for a more systemic approach to macroeconomic, monetary and financial policies, instead of one that prioritizes price-level stabilization alone. In comparison, the debate on the management of international capital flows is far from consolidated, both in theoretical terms and with regard to economic policy recommendations. Regulation of these flows has received less attention, even though these are crucial for emerging economies (Ocampo 2012). The maintenance of a stable exchange rate to preserve the external competitiveness of the economy and the prevention of financial instabilities and financial crises represent particular policy challenges for countries confronted with huge capital inflows.