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
