Approximately 100 Boston university students, faculty, and other guests attended the Pardee Seminar held on March 8 that introduced the new Pardee Center Task Force Report titled Regulating Global Capital Flows for Long-Run Development.
The seminar was organized by Pardee Faculty Fellow Kevin Gallagher, co-chair of the Task Force that produced the report. Other speakers included Task Force Co-Chair Prof. José Antonio Ocampo (Initiative for Policy Dialogue, Columbia University and former Finance Minister of Colombia) and Task Force member Prof. Ilene Grabel (Korbel School of International Studies, University of Denver).
All three speakers are participating in a similar presentation on the same topic at a session of the Eastern Economic Association meeting in Boston on March 9.
The panel presented highlights from the report, which includes essays by more than a dozen leading scholars and economists who suggest that in the wake of the 2008 financial crisis, some form of capital account management or regulation is both necessary and desirable. The report includes a close look at the experience of countries that have already employed various forms of controls on capital flowing into and out of their economies, and calls on international financial institutions to support the expanded use of such tools by developing countries.
All three speakers discussed the need for regulations on flows of capitals between developed and developing countries to help prevent the short-term, speculative investments leading to “boom and bust” cycles that have wreaked havoc on the economies of developing countries and limited their ability to make long-term economic progress. Over the past 30 years or so, the International Monetary Fund (IMF) and other international financial institutions have actively discouraged any regulations on cross-board capital flows, such as special taxes on foreign investment or setting requirements for a minimum amount of time a foreign investment must remain in a country. In addition, many free trade agreements and bilateral trade agreements – especially those involving the United States – include specific provisions prohibiting the countries involved from using such financial tools.
Prof. Gallagher noted the charter of the IMF, which was founded 65 years ago, specifically includes a provision allowing countries to implement regulations on the flows of capital into and out their economies from outside of their borders. It worked well until about the mid-1980s, he said.
Prof. Ocampo said that when countries use typical financial tools to address domestic issues – such as raising interest rates to slow domestic spending – it can create a spike in short-terms foreign investments, leading to a counter-productive boom-and-bust cycle. Countries that have employed capital account regulations in such situations have shown that such regulations help to lessen the volatility. Cross-board capital flows have become “a normal type of finance that has generated problems and need to be regulated like other types of finance,” he said.
Prof. Grabel said that the “silver lining” of the financial crisis may be that policy makers in several developing countries have experimented with various forms of capital account regulations, with positive results. This allows other countries – and international financial institutions – to see how such measures can be beneficial. “We’re now seeing capital controls as part of the (financial) policy toolkit, and it is becoming easier for other countries” to adopt such measures, she said. Still, she said, “we need recognition that developing countries have the right to experiment” with capital controls.
The Pardee Task Force Report is part of the Pardee Center’s Global Economic Governance Initiative led by Prof. Gallager. The Task Force that produced the report was co-sponsored by the Initiative for Policy Dialogue at Columbia University and the Global Development and Environment Institute at Tufts University.