IMF Survey: IMF Adopts Institutional View on Capital Flows
IMF News, December 3, 2012
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- Published: December 3, 2012
Overview and purpose
- The International Monetary Fund has developed a comprehensive, flexible, and balanced view on the management of global capital flows to help give countries clear and consistent policy advice.
- The new institutional view is the culmination of work begun two years ago to develop a pragmatic, experience-based approach to help countries cope with capital flows.
- The IMF issued a synthesis of its work that the IMF Executive Board endorsed on December 3, 2012.
- Goal: help countries reap the benefits of capital flows while managing their risks.
Context and trends
- Global capital flows increased from an average of less than 5 percent of global GDP during 1980-1999 to a peak of about 20 percent by 2007.
- Countries’ capital accounts have ranged from almost completely closed to completely open; most countries have moved toward greater openness, but wide differences remain.
- Capital flows include foreign direct investment (FDI), portfolio flows (including investment in bonds and equities), and bank borrowing.
Benefits and risks of capital flows
- Benefits:
- Help a country’s financial sector become more competitive and sophisticated.
- At the global level, achieve a better allocation of capital that fosters higher growth.
- Help smooth the adjustment of economic imbalances between countries.
- Risks:
- Capital flows are volatile and can be large relative to the size of a country’s financial markets or economy.
- Volatility can lead to booms and busts in credit or asset prices and increase vulnerability to contagion from global instability.
- The global crisis is cited as the latest event showing the need for vigilance.
Key features of the institutional view (as stated)
- Capital flows can have substantial benefits for countries. At the same time, they also carry risks, even for countries that have long been open and drawn benefits from them.
- Capital flow liberalization is generally more beneficial and less risky if countries have reached certain levels or “thresholds” of financial and institutional development.
- Liberalization needs to be well planned, timed, and sequenced in order to ensure that its benefits outweigh the costs.
- Countries with extensive and long-standing measures to limit capital flows are likely to benefit from further liberalization in an orderly manner. There is, however, no presumption that full liberalization is an appropriate goal for all countries at all times.
- Rapid capital inflow surges or disruptive outflows can create policy challenges. Appropriate policy responses involve both countries that are recipients of capital flows and those from which flows originate.
- For countries that have to manage the risks associated with inflow surges or disruptive outflows, a key role needs to be played by macroeconomic policies, as well as by sound financial supervision and regulation, and strong institutions. In certain circumstances, capital flow management measures can be useful. They should not, however, substitute for warranted macroeconomic adjustment.
- Policymakers in all countries, including countries that generate large capital flows, should take into account how their policies may affect global economic and financial stability. Cross-border coordination of policies would help to mitigate the riskiness of capital flows.
Institutional implications and next steps
- The institutional view reflects a very broad consensus of the IMF's membership and will guide the institution’s advice to its member countries, without prejudice to the need to take into account country circumstances.
- The view does not alter members’ rights and obligations.
- The IMF plans to develop operational guidance to integrate this view in its work.
- The view will evolve over time to incorporate new lessons from country experiences, analytical work, and feedback from country authorities and other interlocutors.
Notable commentary
- David Lipton, the IMF’s First Deputy Managing Director: “We need to be in a position to provide clear and consistent advice with respect to capital flows and the policies related to them,” and the work “clarifies the trade-offs between policy options for dealing with the risks related to capital flows, harnessing the benefits of capital mobility, and addressing the implications of capital flow management for global economic and financial stability.”
IMF Survey online, December 3, 2012.