Comments on: Not Your Grandfather’s IMF: The emergence of policy space in the wake of global economic crisis?

By: Ilene Grabel

Ilene Grabel — Sun, 21 Mar 2010 18:49:18 +0000

You are absolutely right. RTAs and BITs have been powerful constraints on policy space in the developing world. It is heartening that some countries have begun to rethink the terms of the agreements that they have signed since many of them: a.) restrict the right to pursue a range of developmentalist policies, b.) empower juridical bodies (such as ICSID) and corporations over elected governments, and c.) in practice, don’t even achieve their most basic objective, which is to promote investment.

By: Smitha Francis

Smitha Francis — Fri, 19 Mar 2010 11:50:57 +0000

Good piece. In fact,Jonathan Ostry, the IMF’s deputy research director and principal author of the new IMF staff paper on “The role of capital controls” says the change in IMF position was “evolutionary.” http://www.npr.org/templates/story/story.php?storyId=124792660.
Although this change in the position of the IMF is indeed noteworthy, what will become crucial and more relevant on the ground for many countries in the context of the various RTA and BIT negotiations, is the extent to which countries can maintain their sovereign right to put in appropriate controls on inflows and outflows, with increasingly broader ‘definitions’ of ‘investment’ being pushed for by developed countries in these negotiations.

By: Ilene Grabel

Ilene Grabel — Tue, 16 Mar 2010 22:11:13 +0000

Kevin is right on both counts.

There are cases where controls on capital outflows have protected policy space and enhanced various dimensions of financial stability in developing countries. The Malaysian experience, as he notes, is an important one to consider in this regard. And so is the case of Iceland. Despite the silence on Iceland in the new IMF report, it is notable that the Fund’s economists so clearly argued that it was necessary for Iceland to control capital outflows as the economy was unraveling.

The Fund’s position on Iceland’s controls might create intellectual space for policymakers in other countries to invoke the “necessity defense” when it comes to controlling both inflows and outflows during times of heightened financial risk. Advocates of increased policy space can use the Fund’s defense of Iceland’s capital controls to promote debate on the possible uses of outflow controls. Iceland and Malaysia’s use of outflow controls underscores the importance of reclaiming the right to manage international capital flows, a right that has been compromised in many bi- and multi-lateral trade and investment agreements (as work by many progressive economists and civil society groups has shown).

Like controls on inflows, controls on outflows are among the many policy tools that should be available to developing countries. Toward this end, some years ago Gerald Epstein, Jomo KS and I wrote in a G24 paper that controls on inflows and outflows should be considered (along with a range of other measures) “capital management techniques.” In that paper we describe the performance of many types of capital management techniques that have been deployed in a variety of national contexts
(http://www.unctad.org/en/docs/gdsmdpbg2420043_en.pdf)

By: VanyK

VanyK — Wed, 10 Mar 2010 17:54:03 +0000

It is useful to try everything in practice anyway and I like that here it’s always possible to find something new.

By: Nuria Molina

Nuria Molina — Tue, 09 Mar 2010 18:45:35 +0000

Great article, indeed. And extremely useful and hopeful concept the one of “productive incoherence” for those of us who’ve been longing opening up some policy space on mainstream macroeconomic advice.

Are the Europeans (led by obsessive Germany) going to tighten screws as the Fund loosens up?

While IMF (may be) loosening up, Europeans tighten the screws…http://www.eurodad.org/blog/index.aspx?id=4028&blogid=1758

By: Kevin P. Gallagher

Kevin P. Gallagher — Tue, 02 Mar 2010 04:07:09 +0000

Nice article. A substantive concern is that the IMF report does not touch the question of controls on outflows. As Ilene discusses above, the immediate concern are carry trade related as asset bubbles loom in the developing world. However, when higher income nations begin to move away from their (jobless)recovery phase and start obsessing about their debt, high interest rates in the north could trigger massive capital outflows from developing countries. Guillermo Calvo, surprisingly, has recently said that “sudden stops” of inflows in the wake of this crisis could warrant controls on outflows as well. Here the mainstream economics profession is still very far from making statements like the IMF just did on controls on inflows, despite the fairly rigorous evidence showing that Malaysia (at least) was able to benefit from controls on outflows in the aftermath of the Asian crisis.

Great minds think alike: I have a piece on the IMF inflows report in today’s Guardian: http://www.guardian.co.uk/commentisfree/cifamerica/2010/mar/01/imf-capital-controls.

On the inflation targeting, that is also ground breaking. Above my pay grade but I hope some economists are now crunching the following numbers:

1) the extent to which a 4 percent target and subsequent inflation will reduce the sovereign debt burden of particular countries; and
2) the extent to which a 4 percent target will increase employment.

Seems to me if, after pointing to the IMF for “legitimacy”, such estimates could be used to pressure nations (like the US) that will try to maintain the 2 percent targets. In this environment, pinpointing debt reduction employment effects carry the political moment.