Home > The Economics Profession > IMF’s Welcome Rethink on Capital Controls

IMF’s Welcome Rethink on Capital Controls

from Kevin P. Gallagher

In contrast to most western governments, over the past two years, the International Monetary Fund (IMF) has boldly conducted one of the most honest self-assessments of its actions leading up to the financial crisis, has become somewhat critical of inflation-targeting and has endorsed the use of capital controls. In March of this year, the IMF held a full conference on rethinking macroeconomics where its organisers concluded that the crisis has shattered the economic orthodoxy behind the fund’s previous policies.

In preparation for its annual meetings next week, on Tuesday the IMF took its work on capital controls a step further by issuing two reports (one official report and one staff discussion paper) outlining when nations should use capital controls, and what types of capital controls should be used under the proper circumstances. The new reports amount to yet another big step forward for the IMF – though there is still a long way to go.

In February 2010 the IMF changed its stance on capital controls because IMF economists’ own analyses found that, over and again, when developing countries used capital controls, they worked. Indeed, the IMF found that those nations that used capital controls were among the least hard-hit during the crisis.

In a nutshell, the newest IMF report on controls does three things. First, it shows how post crisis capital flows to developing nations have been dominated by volatile portfolio flows and have therefore been destabilising, and that some nations resorted to capital controls to cope with those flows, with some success. Second, it importantly proposes a new nomenclature for capital controls, referring to them as capital flow management measures (CFMs). Third, it puts forth a set of guidelines for when nations should (and should not) deploy such measures and what form CFMs should take.

The first two components of the report are landmark for the IMF. The IMF has now recognised that capital flows can be destabilising – causing currency appreciation, asset bubbles and volatility – for developing countries. Their analysis of the recent use and modest success of controls by nations like Brazil confirms a preliminary analysis by one of us published last month where Kevin Gallagher found that controls in Brazil and Taiwan were associated with a reduction in the pace of currency appreciation and with helping those nations achieve a more independent monetary policy.

The IMF has also recognised that referring to these measures as capital “controls” brings great stigma. In earlier work, José Antonio Ocampo has referred to such measures as “capital account regulations”, and other colleagues have called them “capital management techniques” (pdf) to the same end.

Where the report is lacking is in the IMF’s determination of the efficacy of CFMs and what types should be used. The report recommends that CFMs be used as a last resort and as a temporary measure, and only after a nation has accumulated sufficient reserves, tinkered with interest rates and let its currency appreciate. When measures are used, the IMF suggests that CFMs not discriminate against the residency of a capital flow.

This has not been well-received in developing world. Without the advice of the IMF, many nations have deployed CFMs, both discriminatory and nondiscriminatory, alongside a host of other macroeconomic and macro-prudential policies as they have seen appropriate. And according to the IMF’s own research, CFMs have been a success – even though they have sometimes not met those guidelines.

Interestingly, the accompanying IMF staff discussion paper is somewhat less strident, saying:

“there is no unambiguous welfare ranking of policy instruments (though nondiscriminatory prudential measures are always appropriate), and a pragmatic approach taking account of the economy’s most pertinent risks and distortions needs to be adopted.”

What is also disappointing from the report is what is not there. Even more importantly for setting guidelines for the use of CFMs, the IMF should focus at least equally on helping nations enforce such measures when they deem them appropriate. Many CFMs only work partially and for a short time because controls are evaded by foreign investors. Designing a regime to help nations enforce CFMs would be a welcome addition to the global financial system. Particularly important in this regard is to undo the de facto regime consisting of a tangled web of trade treaties that outlaw many CFMs.

This is also linked to the fact that the report does not follow through the implications of the statement that “the onus of policy adjustment from inflow surges rests solely on these countries.” This is another area where the IMF could join a global debate (Gallagher has written on this with Stephany Griffith-Jones) on the extent to which capital account regulations could be coordinated on a global level – indeed, as part of the global process to re-regulate finance. It’s worth recalling that in the meetings that led up to the establishment of the IMF, both Harry Dexter White and John Maynard Keynes agreed (pdf) that capital controls be targeted at “both ends” of a capital flow.

The IMF is to be applauded for taking another step towards a more integrative and development-friendly approach to global finance. It still has a way to go.

Published by the Guardian on April 6, 2011

for more Gallagher Guardian columns see:


  1. April 26, 2011 at 3:51 am

    How can a nation/state have any kind of political/financial independence without capital inflow and outflow controls? Their absence is an invitation to financial rape of a nation.

    • Alice
      April 26, 2011 at 11:59 am

      Could not agree more Helge. It was the very systematic reduction in capital controls, that caused this mess and its rather quaint that the restoration of capital controls is on the IMFs discussion list. For what is the IMF itself now but an archaic vestige of the last of any institutional controls? And the IMF is hobbled and rendered ineffective by the very capital it helped free. The IMF cannot speak truth to power when it only speaks the language of power.

      The tiger is out of the cage and 10 years or 20 years or 30 years of conference chatter about global laws isnt going to get it back in. The IMF are still dreaming of the perfect global world despite the many financial rapes of many nations.

  2. Podargus
    April 26, 2011 at 7:38 am

    It is tragic,from the point of view of institutions like the the IMF and the World Bank,when nations take unilateral action to protect their own interests.

    Welcome to the real world,fellas.Globalization and free trade do not work and will never work.

    • Dave Taylor
      April 26, 2011 at 1:53 pm

      It is tragic from the point of view of the IMF? It is tragic that nations need to take unilateral action to safeguard their own interests!

      I find Gallagher’s article more encouraging than Mark Weisbrot’s on IMF “rhetoric” on 19th April, not least because it seems some IMF staff are becoming aware of the second of the fundamental faults I outlined in response to that:

      – theory based on LIES like different kinds of real value being equivalent because they can all be reduced to monetary value, when in fact money is merely an IOU which, if used, causes its user to become not richer but more indebted – not to the bank which printed it but to the society which exchanged it for real goods. [To society rather than specific traders: the “hitch-hiker” model].

      – practice based on a PRETENCE that banks and corporations are still national institutions when in fact they have been internationalised by corrupt or naive politicians being “persuaded” to remove currency and share trading controls.

      I can agree, Podargus, that Globalization and free trade do not work and never will, but leaving it at that won’t help. The first of my fundamental faults can be highlighted by asking “What kind of trade?” and finding free trade applicable only to surplus consumables. The second can be addressed by making traders responsible for their own balance of trade instead of dumping that responsibility on us via our governments.

  3. Jorge Buzaglo
    April 26, 2011 at 3:31 pm

    On IMF groupthink: “The reality is that tens of millions of people across the globe have seen their lives wrecked because these economists did not know what they were doing – or worse, had doubts but chose the safer route of groupthink. It is outrageous that ordinary workers who were doing their jobs can end up unemployed, while the economists whose mistakes led to their unemployment can count on job security.” (Dean Baker)

  4. April 27, 2011 at 6:29 am

    I think it’s basically over for the IMF; its expulsion from Asia, the most dynamic region in world economically pretty much guarantees fading power.

    • Alice
      April 27, 2011 at 10:13 am

      Its basically over for the IMF because a) they promoted globalisation and atively pushed for privatisation of public services in so many nations who relied on public sector employment and services to keep inequality fom growing into the ugly monster it is now and WHEN b) thee were no firm global laws in places to prevent financial rape of entire nations by global financial speculators and c) they cannot even guarantee their own funding now given they have pushed privatisation beyond all reasonable limits and the bankers own the IMF.

      The IMF are nothing but a joke.

      Let the IMF sink along with the big banks. What use were they?

  5. Jorge Buzaglo
    April 27, 2011 at 10:13 am

    The global spread IMF/neoliberal doctrine has in fact achieved one important positive thing, namely the final decline of western capitalism, and specifically the end of the dominance of US capitalism. The problem is what next: Oriental/despotic capitalism, global democratic socialism, global chaos, or what?

    • Alice
      April 27, 2011 at 10:15 am

      What next? The US economy collapses. Let that be a lesson to all who push false ideologies.

  6. Allen Cookson
    May 2, 2011 at 9:55 pm

    In 1962, along with Marcus Fleming, Canadian economist Robert Mundell (a 1999 Nobel laureate) co-authored the Mundell-Fleming model of exchange rates, and noted that it was impossible to have domestic autonomy, price stability, and free capital flows – that only two of these objectives could be met. Why was this research ignored?

    • Alice
      May 4, 2011 at 11:05 am

      Anyone with an interest is tying capital down wasnt and isnt going to be listened to but it needs to happen,

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