WhoNeedstoOpentheCapital

Account?
OlivierJeanne
ArvindSubramanian
JohnWilliamson
PetersonInstituteforInternationalEconomics
Washington,DC
June11,2012

Purpose
Toreassessthecaseforcapitalaccount
openinginthelightofnewdevelopments
Newtheoreticaldevelopments
Newdiscussionsandthinkinginofficialcircles
Newcrises.

Toproposepolicyattitudesthatwebelieve
theinternationalcommunityshouldadopt.

History
White/Keynestoleranceofcapitalcontrols
basictoBrettonWoods
Increasingcapitalmobilityledtodownfallof
BrettonWoods
LatinAmericandebtcrisisandAsiancrisis
bothcausedbysuddenstop tocapitalinflows
HappenedagainwithE.Europein200809
ThiswasalsothecauseoftheEurozonecrisis.

IMFPolicies
IMFhasneverhadconsistentpolicytoward
capitalmovements
Toleratedtheminearlydays,became
increasinglyhostileculminatinginaborted
1997reform
G20atCannesdisplayedawillingnessto
envisagearegime,butfailedtoformulateone
Weformulateaproposal,tobepresentedin
duecoursebyJeanne/Subramanian.

StatusQuo
Emergingmarketfinancecharacterizedbywide
varietyofapproachestocapitalaccountpolicies
opencapitalaccounts(Chile)
prudentialcontrols(Brazil)
closedcapitalaccount(China).

Unlikefortradeingoods,thereisnointernational
regimetoguide/disciplinecapitalaccount
policies.
Isthisaproblem?

StatusQuo
Oneviewisthatnationaldiscretionisnota
problembecausetradeinassetsismuchless
beneficialthantradeinwidgets(Bhagwati,
1998)
weconfirmtheunderlyingempiricalevidencein
Chapters3and4ofthebook

However,wearguethattheinternational
communityshouldagreeonasetofrulesfor
capitalaccountpolicies
encouragegoodpolicies,discouragebadones
spillovers

TheCaseforInternationalRules
Weunderstandmuchbetterthecasefor
prudential capitalcontrols
curbingtheboombustcycleincapitalflows
newwelfareeconomicsofprudentialcontrols
reviewedinchapter2
countercyclicaltaxoncapitalinflows

Acodeofgoodpracticescouldreducethe
stigma associatedwithprudentialcontrols
theIMFmoretolerant,butstillnotenough

TheCaseforInternationalRules
Capitalaccountpoliciescanbeusedtodistort
exchangeratesandtrade
balancesheetofChinesebankingsector
140

400

120

350

100

300
250

80
200
150

Forexreserves(%GDP,
lhs)

100

TradeBalance($bn,rhs)

60
40

Domesticloansand
portfolio(%GDP,lhs)

20

50

TheCaseforInternationalRules
Correlationbetweenundervaluationandcapitalcontrols

V
EN
B
R
A

ZA
F

C
IV

P
AK

ID
TNH
A
C
H
RN
U
S

IN
D

.2

M
Y
S

P
H
L

A
R
G

C
H
L

Schindler Index, avg

.4
.6

.8

S
LV

TU
R

M
E
X

P
ER

E
C
U

K
O
R

H
U
N

U
R
Y

B
G
R

Schindler vs. Misalignment 2000-2005

-.6

-.4

-.2
0
Misalignment, avg residual

.2

.4

TheCaseforInternationalRules
Theoreticalresult: onecanachievethesame
outcomewithcapitalaccountpoliciesaswith
tariffs(subsidies)onimports(exports).
Practicalimplication:alevelplayingfieldin
internationaltraderequireslimitsontheuse
ofcapitalaccountpolicies.

Proposal
Theinternationalcommunityshouldadopt
internationalnormsforcapitalaccountpolicies
undertheauspicesoftheIMF

Thegoalshouldbetoencouragegoodcontrols
anddiscouragebadones
notpromotefreecapitalmobility

Wewouldfavortransparent,pricebased
measures(e.g.,atax)
witha15%ceiling
caveatsandexemptions

ObstaclestoCooperation
Principleandcontents
Principleofinternationalregulation:Brazil,
emergingmarkets?
Countercyclicaltaxesoninflows:Financialsector
Openingupcapitalaccount:China

SticksandCarrots
Sticks:CountervailingcapitalcontrolsbyUSto
restrictChinesepurchasesofUSgovernment
assets(Bergsten,GagnonandHufbauer)
Carrots:
Grantingmarketeconomystatus
Revisitinginvestmentrulesastheyapplyto
ChineseFDItoUS

Conclusion
Regulationofcapitalflowsoverduetocorrect
foreignfinancefetish
Eurozonecrisis
USFTAsofearly2000swithSingaporeandChile

Asymmetricinternationalregulationoftradeand
capitalflowsincreasinglyuntenable
Needtoregulateproblemoftoomuchinflows
(Brazil)andtoolittleinflows(China)