I am flexible
Capital control is a policy issue particularly close to my heart. Changes in the use of capital control can have a powerful impact on the aid industry by reducing the very need for foreign economic assistance. To put it simply, capital control, and its flip side free capital movement, are two different approaches that countries would take in relation to the ease to bring capital inside a country or outside. How many days does it take to transfer two hundred million dollars from country A to B? How much does it cost? Are there taxes to the export of capital? These and other factors can be influenced by legislators in a country. Any measure put in place to slow down the entrance and the flight of capital falls under the classification of capital control measure.
In the last months, it seems that the IMF (International Monetary Fund) has upgraded its mind on this topic, from pushing with any means toward free capital flow to timidly admitting the validity, under certain circumstances, of capital control. Over the last decade the IMF has been offering loans to developing countries undergoing financial distress. One of the usual conditions, among many others, tended to be to open the country to capital flow. What does it mean? To make a long story short, it implies that capital in any form can be brought is and taken out of the country in very quickly. Instantly. With a click on a mouse! Why is this relevant? Because of the efficient market hypothesis . Very simply put this hypothesis implies that capital tends to be allocated across the world in the most efficient possible way, so it is important to guarantee that there is no obstacle to the effective deployment of resources around the world. Every nation will benefit from this principle as this will maximize global GDP .
However, there is hope at the end of the tunnel! In a recent article on the Wall Street Journal we can read:
“In a recent meeting in Shanghai Mr. Strauss-Kahn directly opened the way for capital control as a possible policy tool in maintaining financial stability and fostering growth in developing countries. Echoing Mr. Strauss-Kahn’s view, Mr. Yi Gang People’s Bank of China Deputy Governor, said that when capital flows generate systemic risks, countries should consider alleviating that through appropriate measures.”
This might be based on the evidence that “The prospect of heavy capital inflows would be destabilising,” says the Fund. “Investors flow data suggests emerging markets tend to suffer from herding behaviour.” (full text) and that “smart capital control has been used by Peru, Argentina, Ecuador, Ukraine” s the Financil Times puts it. Ha-Joon Chang summarizes the point on the Financial Times: “Why capital controls are not all bad” and I rejoice! It is only one tiny step, but the direction seems right.
This is important for development for several reasons, here I want to mention tow. First, the financial instability and crisis induced by the wrong policies can destroy, in a few months, years of progress in economic development, with devastating social repercussions. Bare in mind that low income households tend to have less savings to cushion “the slings and arrows of outrageous fortune T “
More importantly, I hope that this could be the first step toward a broader reintroduction of financial, trade and industrial policies that will promote endogenous development of firms, home grown entrepreneurship, employment and allow countries to break out of poverty with their own feet. Should this happen, the world will be making a step toward the reduction of need for foreign intervention to try to promote economic development from the outside = less aid industry.