Themicroloanfoundation's Blog

IMF and capital controls: total recall
May 5, 2010, 12:15 pm
Filed under: Uncategorized

A recent IMF policy note acknowledged the importance of capital controls in macroeconomic policy. Wait, what?

After nearly thirty years of advocating for financial liberalisation, the neoliberal flagship made a complete turnaround, acknowledging that national governments have a role to play in regulating finance. No doubt, the regulation fever that’s gripping the global north is partly influencing this move.

Joe Stiglitz, ssked how the IMF handled the current crisis compared with the Asian crisis of the 1997-98 said “Much better than last time!” He attributed the improved response partly to the Managing Director Dominique Strauss-Kahn.

The question we’re asking here at MicroLoan ofcourse, is how does this affect finance for developing countries? This advice seems targeted towards developing countries, no doubt hand-in-hand with the IMF’s recommendations for stricter regulations on UK banks.

“Nevertheless, evidence to date on the relative effectiveness of capital controls is ambiguous, according to the paper. Controls appear to work better in countries with existing restrictions, or with strong administrative capacity. Evidence also suggests that controls have more effect on the composition of capital flows than on their volume. “

So what about countries, like Malawi, with financial systems that are a long way from being fully developed? Hopefully, IMF policy will not neglect to grant them this new-found leniency? Capital controls are just as, if not more, necessary in developing countries than developed. In the late 1980s, when Malawi removed its capital controls and liberalised its banking, rural credit access sharply declined. Banks, now free of interest rate restrictions, hiked their rates to a point where only urban upper classes were able to afford credit. Foreign direct and portfolio investment, likewise entered a period of high volatility with capital outflows completely outstripping inflows. We need to learn from the lessons of the past and grant developing countries the same policy freedom that we afford developed ones. In today’s uncertain and dangerous climate for the global south, there is no room for hypocrisy.


2 Comments so far
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Comment by Rocky

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Comment by kasekende Paul

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