IMF Survey: Asia Exchanges Views on Capital Flows and Possible Policy Responses

March 17, 2011

  • Joint conference builds IMF relations in Asia
  • Gathering explores benefits, challenges of capital inflows
  • Policy response needs to be multilateral and coordinated

Indonesian authorities and the IMF gathered together leading academics, investors, and policymakers from Asia and other large emerging market countries for a one-day conference in Bali to exchange views on the benefits of capital flows and how best to manage them.

Asia Exchanges Views on Capital Flows and Possible Policy Responses

No room for complacency: the policy response to capital inflows into Asia needs to be multilateral and coordinated, says the IMF (photo: ImagineChina/Corbis)


Participants at the conference entitled “Coping with Asia’s Large Capital Inflows in a Multi-speed Global Economy,” discussed the challenges facing Asia following the recent surge of foreign money into the region.

The gathering, organized with Bank Indonesia and the Investment Coordinating Board of the Republic of Indonesia, builds on last year’s high-level conference held in Daejeon, Korea, when the Fund sought to draw lessons from Asia’s resilience in the face of the global crisis.

Inflowsgood and bad

The IMF’s head of the Asia and Pacific region, Anoop Singh pointed to the benefits of capital flows, but also said sharp surges could increase the risk of overheating and raise concerns over financial stability.

He said that policy responses had varied across countries, but macroeconomic measures had been the first line of defense in Asia. Overall, now that output gaps were generally closing in Asia, he said that countries were right to normalize macroeconomic policies and there was room for further movement in this direction.

His words were echoed by Bank Indonesia Governor, Damin Nasution, who also called on policymakers to implement structural reforms, to harness their countries’ ability to take advantage of intermediate large flows.

Nasution called for a policy mix that combined macroeconomic policy responses, macro-prudential measures, and structural reform, noting that large portfolio inflows had a strong impact on domestic financial markets, and could lead to asset price bubbles, inflationary pressures and current account deterioration.

Lessons learned

The meeting represented an opportunity for the policymakers from different parts of the world, to interact and share their experience of managing capital flows.

Gita Wirjawan, Chairman of the Indonesia Investment Coordinating Board (BKPM) shared the Indonesian experience of transforming capital inflows into “smart capital” which, he said, could facilitate long-term investment and global rebalancing.

He added that structural reforms would improve the absorptive capacity of emerging markets and strengthen incentives for longer-term investment inflows.

The keynote speaker to the conference, Jeffrey Frankel of Harvard University, suggested that the current period represented possibly the fourth episode of large inflows to emerging markets, after earlier surges in the 1970s, 1990s and early 2000.

Given the stronger fundamental backdrop, including better economic fundamentals in emerging markets, combined with low growth and weaker macro balance sheets in advanced economies, Frankel suggested this episode could prove different if the increase in capital flows proved to be more permanent than in the past.

Global safety net

As well as discussions about the need to tailor the policy response to the circumstances of individual countries, Japan’s Vice-Minister of Finance for International Affairs, Rintaro Tamaki, stressed the additional need for a global safety net to support countries hit by global shocks.

Tamaki suggested that the facilities of the Fund should be large, precautionary, rapidly disbursing, and involve collaboration with regional arrangements such as the Chang Mai Initiative.

He said recent measures to make the Fund more representative had increased its legitimacy and this could help garner wider approval for it to take a more prominent role in ensuring financial stability and in capital account surveillance.

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