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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U.S. Fiscal Policy: Avoiding Self-Inflicted Wounds


by Gian Maria Milesi-Ferretti

(Version in Español)

The United States and much of the world economy are still recovering from the devastating global recession that began in 2008. Sometimes crises happen that we cannot foresee or avoid.

But for the U.S. economy, serious risks could come at the end of this year from two potential self-inflicted wounds: the so-called “fiscal cliff” and the debt ceiling.

Let’s start with the fiscal cliff. In simple terms: if U.S. policymakers do nothing, a number of temporary tax cuts will expire and significant across-the-board spending reductions will kick in on January 1, 2013. The combined effect of these measures could result in a huge fiscal contraction, which would derail the economic recovery.

Why is this happening?

The payroll tax break, the Bush tax cuts (enacted in 2001 and 2003, and extended for two years at the end of 2010), as well as exemptions on the Alternative Minimum Tax are set to expire on January 1, 2013.

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Financial Support for Arab Countries in Transition


By Masood Ahmed

(Version in عربي)

The Arab Spring has injected new optimism into the Middle East and North Africa and, if managed well, the historic transitions that are under way will lead to a more prosperous future for the people of the region.

At the same time, the past year and a half has been difficult for the Arab countries in transition. They are facing economic strains as they manage political change and urgent social demands. It is a period when hard choices must be made, and it does not help that this is happening at a time of great turmoil in the global economy.

Close engagement

Throughout this difficult period, the IMF has remained closely engaged. We are advising countries on how to manage shocks to maintain economic stability, ensure that vulnerable households are protected during the transition, and lay the basis for job-creating growth.

We are also providing technical assistance to help build capacity and stronger institutions. In Egypt, for example, on tax reform to improve tax equity; in Libya to better manage its wealth through improved public financial management; and in Tunisia on measures to strengthen the financial sector.

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World Faces Weak Economic Recovery


By Olivier Blanchard

(Versions in  عربي中文EspañolFrançaisРусский日本語)

The global recovery continues, but the recovery is weak; indeed a bit weaker than we forecast in April.

In the Euro zone, growth is close to zero, reflecting positive but low growth in the core countries, and negative growth in most periphery countries.  In the United States, growth is positive, but too low to make a serious dent to unemployment.

Growth has also slowed in major emerging economies, from China to India and Brazil.

Downside risks, coming primarily from Europe, have increased.

Let me develop these themes in turn.

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Can Policymakers Stem Rising Income Inequality?


By David Coady and Sanjeev Gupta

The issue of rising income inequality is now at the forefront of public debate. There is growing concern as to the economic and social consequences of the steady, and often sharp, increase in the share of income captured by higher income groups.

While much of the discussion focuses on the factors driving the rise in inequality—including globalization, labor market reforms, and technological changes that favor higher-skilled workers—a more pressing issue is what can be done about it.

In our recent study we find that public spending and taxation policies have had, and are likely to continue to have, a crucial impact on income inequality in both advanced and developing economies.

In advanced economies, this is especially important given that the ongoing fiscal adjustment needs to be continued for many years to reduce public debt to sustainable levels. But it is equally important in developing economies where inequality is relatively high.

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Global Crisis — Top Links from the IMF for Economics and Finance


Our top links for June, 2012 from iMFdirect blog and others:

Lessons from Latvia


By Olivier Blanchard

In 2008, Latvia was widely seen as an economic “basket case,” a textbook example of a boom turned to bust.

From 2005 to 2007, average annual growth had exceeded 10%, the current account deficit had increased to more than 20% of GDP.  By early 2008 however, the boom had come to an end, and, by the end of 2008, output was down by 10% from its peak, the fiscal deficit was shooting up, capital was leaving the country, and reserves were rapidly decreasing.

The treatment seemed straightforward: a sharp nominal depreciation, together with a steady fiscal consolidation.  The Latvian government however, wanted to keep its currency peg, partly because of a commitment to eventually enter the euro, partly because of the fear of immediate balance sheet effects of devaluation on domestic loans, 90% of them denominated in euros.  And it believed that credibility required strong frontloading of the fiscal adjustment.

Painful adjustment

Many, including me, believed that keeping the peg was likely to be a recipe for disaster, for a long and painful adjustment at best, or more likely, the eventual abandonment of the peg when failure became obvious.

Nevertheless, given the strong commitment of both Latvia and its European Union partners, the IMF went ahead with a program which kept the peg and included a strongly front-loaded fiscal adjustment.

Four years later, Latvia has one of the highest growth rates in Europe, the peg has held, and the fiscal and current accounts are close to balance.

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