Capital Controls Key Part of “Emerging Market Investor Consensus”
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In China and Taiwan, regulators are imposing fresh restrictions on stock market investments by foreigners.
In Brazil, officials have twice raised taxes on foreign investors.
Even in South Korea, pressure is building on the government to take similar steps.
An increasing number of emerging markets powers have either imposed curbs or are in the process of doing so
to slow the torrent of hot money into their markets.
In China and Taiwan, regulators are imposing fresh restrictions on stock market investments by foreigners.
In Brazil, officials have twice raised taxes on foreign investors.
Even in South Korea, pressure is building on the government to take similar steps.
An increasing number of emerging markets powers have either imposed curbs or are in the process of doing so
to slow the torrent of hot money into their markets.
Over the years, foreign capital flowing into emerging markets has played a crucial role in helping finance
- roads in India,
- factories in China and
- buyers of luxury cars in Brazil.
But as the sums have compounded and led to more market volatility,
fast-growing countries have begun to worry that short-term investment will
- push up the value of their currencies,
- make their goods less competitive in the global market, and
- lead to asset bubbles that will be painful to deflate.
Once a core policy commandment of the so-called Washington consensus,
and held dear by the United States Treasury, the International Monetary Fund and global investment banks,
the belief that unfettered capital flows are a boon for everyone — including the country on the receiving end — has been dealt a major blow.
Short-term investment is now increasingly viewed as something that needs to be controlled.
“The world has learned about the perils of free market finance — global financial liberalization just does not work as advertised,”
said Dani Rodrik, a political economy professor at the John F. Kennedy School of Government at Harvard.
“Just as John Maynard Keynes said in 1945 — capital controls are now orthodox.”
Many countries are discussing additional steps because they fear that
the Federal Reserve’s latest bid to revive the United States economy by pumping an additional $600 billion into the banking system
will further weaken the dollar and send more money into fast-growing markets.
The latest restrictions are as various as taxes on bond and equity flows,
and extended rules on how quickly short-term capital may be repatriated.
Emerging markets have been grappling with the consequences of a flight of investor capital from rock-bottom interest rates in Western countries in search of higher yields.
Short-term capital investment in emerging markets — largely in stock markets, which are at an all-time high — hit close to $500 billion in 2010,
the highest figure since 2007 when some $800 billion flowed into these markets, according to the Institute of International Finance.
Abandoning its earlier stand, the I.M.F. now recognizes capital controls as a viable policy tool.
Likewise, the United States has expressed sympathy and support for the actions taken by countries with overvalued currencies, like Brazil.
“Capital controls are now part of the emerging-market investor consensus,”
said Gary N. Kleiman of Kleiman International, an emerging-markets consulting firm based in Washington.
“But if there is ever a correction, you will get a harsher view.”
Under what conditions countries should impose controls on investment is a matter of some dispute.
The United States, with its big budget deficit, aggressive monetary easing and weakening currency, may struggle to be the arbiter.
A study by the Peterson Institute for International Economics offers a suggestion.
It argues that policy makers need to distinguish between types of capital controls.
There are the ones deployed by countries like China and a few other Asian export powerhouses intended to keep their currencies low.
They contrast with those being applied by Brazil and others that are intended to avoid asset bubbles and prevent their currencies from rising too quickly.
For fast-growing economies like Brazil and Turkey, where currencies are now overvalued against the dollar by an estimated 9 percent and 16 percent, respectively,
the paper concludes that they are justified in raising selective barriers.
What gives the study an extra bite is that one of its authors is John Williamson,
an international economist who conceived the original notion of the Washington consensus in 1989.
Broadly defined, that long-held view was that developing nations must absorb 10 policies to achieve lasting economic success
- like balancing their budgets,
- privatizing state-owned enterprises and
- opening their markets to foreign investors.
Although there is no mention in the original 10 principles of the importance of the free flow of capital,
such a view came to be associated with a promarket stance that
such flows, along with fiscal discipline and open markets, were crucial for emerging markets to succeed.
“The term took on a life of its own and became associated with free market fundamentalism,”
said Mr. Rodrik, who added that an apogee was reached in the mid-1990s,
when the I.M.F. tried to include the free flow of capital as one of its articles of agreement.
After the Asian crisis in 1997 and the Russian market collapse in 1998,
the notion that such flows were an unquestioned good began to be challenged.
Of course, at the time, many countries were concerned mostly about capital flight and its effect, not inflows.
Despite China’s success in maintaining tight control over its currency,
and the recent actions of Taiwan, Brazil and others,
not all emerging markets are erecting barriers, according to this article in the New York Times.
In India, where a record-breaking stock market has lured billions of dollars,
officials have said that they do not intend to impose new restrictions.
Similarly, policy makers in booming Turkey say they will not impose controls, despite calls for action from some of the country’s exporters.
Prime Minister Recep Tayyip Erdogan even went so far as to say that a strong currency was a source of pride for Turks.
