Capital Controls: When Are Multilateral Considerations of the Essence?


By Jonathan D. Ostry

One of the main arguments against capital controls is that, though they may be in an individual country’s interest, they could be multilaterally destructive in the same way that tariffs on goods can be destructive.

A particular concern is that a country might impose controls to avoid necessary macroeconomic and external adjustment, in turn shifting the burden of adjustment onto other countries.

A proliferation of capital controls across countries, moreover, may not only undercut warranted adjustments of exchange rates and imbalances across the globe, it may lead in the logical extreme to a situation of financial autarky or isolation in the same way that trade wars can shrink the volume of world trade, seriously damaging global welfare.

So should multilateral considerations trump national interests?

Possible rationales for controls

To begin, it is worth reviewing some of the reasons why countries may wish to impose controls.

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Bridging the Gap: How Official Financing Can Ease the Pain of Adjustment


By Nicolás Eyzaguirre

After three and a half demanding and fulfilling years at the International Monetary Fund, I’ve had a chance to see, up close, countries trying to cope with the global economy in the same way a cook might operate a blender without the lid on—carefully, while creating as little mess as possible.

As I step down from my position as Director of the IMF’s Western Hemisphere Department, I would like to share some reflections on one of the central issues facing many countries—adjustment under fixed exchange rates.  It goes without saying that these reflect a personal and not an institutional view.

A lot of ink has been spent over the question of why you would lend money to a country trying to bring down its government debt and deficit. The answer is simple: to give the reforms needed to make economies competitive again time to kick in.

In the old days, fixed exchange rates were the norm rather than the exception. A body of literature and a wealth of country experience have accumulated on how to adjust under such exchange rate regimes, mostly in emerging economies. The expression “adjustment and financing” came to summarize what economies should do when faced with severe funding constraints brought on by high borrowing costs for government debt in financial markets.

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Practicing Safe Borrowing in Low-income Countries


By Hugh Bredenkamp

Low-income countries face vast development needs. One of the biggest impediments to rapid growth is a massive “infrastructure deficit.”

In sub-Saharan Africa, for example, indicators of road and rail infrastructure are only about half those in developing countries as a whole—comparisons with advanced economies, of course, would look even bleaker. Insufficient power generation capacity and telecommunications networks are also a big constraint. It is clear that large-scale investment programs, sustained over many years, will be needed to close these gaps. Both private and public sectors will have a role to play.

The snag, of course, is that investment spending typically has to be financed by borrowing, and until quite recently, the ability of low-income country governments to take on more debt has been severely hampered by legacies from the past. Many had built up unsustainable debt as a result of bad borrowing and spending decisions, poor project implementation, weak revenue systems (governments could not collect the taxes needed to service the debts), and often bad luck (as their economies were hit by global shocks). In effect, these countries were caught in a debt trap.

Infrastructure remains a big problem in many low-income countries (photo: Reuters)

Infrastructure remains a big problem in many low-income countries (photo: Reuters)

But the world is changing. Large-scale debt relief, as well as big improvements in policies and public institutions, means that an increasing number of countries can now ramp up investment spending more efficiently than in the past, and borrow more aggressively for that purpose. They are starting with a clean slate. But not all countries are at this point. In fact, the majority still have more to do to on the policy and institution building front, and will need to borrow cautiously in the interim. Nevertheless, the greater diversity we see now among low-income countries needs to be reflected in how IMF-supported programs are designed (alert readers will notice that this has been a theme in my blogs this week).

What does this mean in practice? Well, for a start, we need a more flexible policy for setting limits on government debt in programs. For the past 30 years, the traditional low-income country program has permitted only highly concessional borrowing (that is, on subsidized terms), which generally rules out financing from the private sector, or from lenders who are not willing or able to provide sufficiently generous terms. There were case-by-case exceptions, but this was bascially the way it worked.

We are now moving (effective in December) to a new framework with built-in flexibility, linked directly to the circumstances of individual countries. Those with the lowest debt vulnerabilities and strongest capacity to manage public resources (assessed on the basis of widely-used indicators) will have much greater leeway than in the past to pursue borrowing strategies that mix concessional and nonconcessional sources of finance.

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