The IMF Needs Fresh Thinking on Capital Controls

The IMF has slapped Brazil's wrist for daring to impose a 2% tax on short-term capital inflows. But such capital controls make a lot of sense, because “hot” inflows make it difficult for financially open economies like Brazil to maintain a competitive currency, depriving them of what is in effect the most potent form of industrial policy imaginable.

CAMBRIDGE – Why does the International Monetary Fund make it so hard for people like me to love it?

The IMF has said and done all the right things since the crisis. It has acted as quickly as any international bureaucracy can to establish new lines of credit for battered emerging-market countries. It revamped its loan conditions to fit the times. Under its capable managing director, Dominique Strauss-Kahn, and distinguished chief economist, Olivier Blanchard, it has been a voice for sanity on global fiscal stimulus in the midst of much cacophony. For an institution that seemed on the verge of irrelevance not too long ago, this is quite a transformation.

But now Strauss-Kahn is throwing cold water on proposals to tax international flows of “hot money.” The occasion was Brazil’s decision to impose a 2% tax on short-term capital inflows to prevent a speculative bubble and further appreciation of its currency. When asked about the role of capital controls, Strauss-Kahn said he was not wedded to any rigid ideology on the subject. Nonetheless, according to the Financial Times which reported the IMF chief’s views, “the IMF would not recommend them as a standard prescription either – as they carried costs and were usually ineffective.” Unfortunately, this makes the new IMF sound too much like the old one.

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