The G-20’s Helpful Silence on Capital Controls

NEW YORK – When French President Nicolas Sarkozy took the reins as host of this year’s G-20 summit, to be held in Cannes on November 3-4, he called on the International Monetary Fund to develop an enforceable “code of conduct” for the use of capital controls (or capital-account regulations, as we prefer to call them) in the world economy. The IMF followed through by publishing a preliminary set of guidelines this past April.

Regulation of cross-border capital flows has been strangely absent from the G-20’s agenda, which is aimed at strengthening financial regulation. But they are a central element in the financial volatility that incited calls for stronger regulation in the first place. The IMF has shown that those countries that deployed capital-account regulations were among the least hard-hit during the worst of the global financial crisis. Since 2009, it has accepted and even recommended that such regulations are useful to manage the massive inflows of “hot money” into emerging markets.

That said, while the IMF’s proposed code is a step in the right direction, it is misguided. So, the G-20’s endorsement of the Fund’s guidelines would not be wise for a world economy trying to recover from one financial crisis while preventing the next one.

With low interest rates and a slow recovery in the developed countries, accompanied by high interest rates and rapid growth in emerging markets, the world’s investors flocked from the former to the latter – Brazil, Chile, South Korea, Taiwan, and others. Then, in recent months, they flocked out of those emerging countries, showing once again how volatile and dangerous such flows are.