Nonetheless, at the IMF and in advanced countries, the prevailing view remains that capital controls are a last resort – to be used only after conventional macroeconomic and financial policies have been exhausted. Free capital mobility continues to be the ultimate goal, even if some countries may have to take their time getting there.
There are two problems with this view. First, as advocates of capital mobility tirelessly point out, countries must fulfill a long list of prerequisites before they can benefit from financial globalization. These include the protection of property rights, effective contract enforcement, eradication of corruption, enhanced transparency and financial information, sound corporate governance, monetary and fiscal stability, debt sustainability, market-determined exchange rates, high-quality financial regulation, and prudential supervision. In other words, a policy aimed at enabling growth in developing countries requires first-world institutions before it can work..
The second problem concerns the possibility that capital inflows may be harmful to growth, even if we leave aside concerns about financial fragility. Advocates of capital mobility assume that poor economies have lots of profitable investment opportunities that are not being exploited because of a shortage of investible funds. Let capital come in, they argue, and investment and growth will take off....
In such a world, treating capital controls as the last resort, always and everywhere, has little rationale; indeed, it merely fetishizes financial globalization. The world needs case-by-case, hardheaded pragmatism, recognizing that capital controls sometimes deserve a prominent place.Project Syndicate
Global Capital Heads for the Frontier
Dani Rodrik | Professor of Social Science at the Institute for Advanced Study, Princeton, New Jersey
6 comments:
Eventually these people will realise that a floating rate non-convertible currency is a capital control and properly managed is the only one you're likely to need.
What do you mean by "properly managed"?
for follow up comments
Central banks are currently flown largely according to Volker rules. They never work.
Instead you need a pilot that has learnt you push the stick forward when you're in stall rather than pulling back hard as the Russians have.
And then when the plane hits the ground hard everybody blames the plane and not the badly trained pilot.
So you're saying we don't need capital controls if fiscal policy is right?
I wouldn't say just fiscal policy and long as we are going all hypothetical. There are many places a spanner can be thrown in the works when ignorance and self-interest rule — and especially when ignorance is powered by self-interest, as it is when large sums and vested interests are involved. This is always the case in oligarchic democracy were policy, including fiscal policy, are set by rented politicians owing to a selection system based on class status, power and wealth. The entire system is rotten and needs an overhaul or replacement. It's no longer even "capitalism" but neo-feudalism.
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