Transcript for the Conference Call on the Release of IMF Paper on the Liberalization and Management of Capital Flows—An Institutional View
Vivek Arora, Assistant Director, IMF’s Strategy, Policy, and Review Department
Jonathan Ostry, Deputy Director, IMF’s Research Department
Karl Habermeier, Assistant Director, Monetary and Capital Markets Department
Nadia Rendak, Senior Counsel, Legal Department
Gita Bhatt, External Relations Department
MS. BHATT: Good morning, everyone. I am Gita Bhatt, from the IMF External Relations Department. Welcome to this conference call on the "IMF Paper on the Liberalization and Management of Capital Flows—An Institutional View." The IMF lead authors for the paper are with us today: Vivek Arora, who is the Assistant Director of the IMF's Strategy, Policy, and Review Department; Jonathan Ostry, who is the Deputy Director of the IMF's Research Department; Karl Habermeier, who is the Assistant Director of the Monetary and Capital Markets Department; and Nadia Rendak, who is Senior Counsel with the Legal Department.
Without much ado, let me turn it over to Vivek Arora, who will make some brief opening remarks, after which we will take your questions.
MR. ARORA: Thank you, Gita. Good morning, everyone, and thank you for your attendance this morning.
You will have seen the public information notice and the paper that we are releasing today. So let me just highlight briefly a few points.
To begin, I want to say that the paper is the culmination and synthesis of work that has been done at the Fund over the last three years to develop an institutional view on capital flows and related policies. The work has included four previous papers on various aspects of capitals flows as well as supporting analytical work. The paper that we are releasing today has built on feedback in response to the previous four papers.
The previous papers considered issues of how to manage capital inflows and outflows, the liberalization of capital flows, the role of the Fund, and the multilateral aspects of capital flows. The present paper outlines a comprehensive view, in the sense that it covers all of these issues, and it was drafted by staff from various IMF departments, given the different aspects that are involved in such an exercise.
This paper represents an important step for the Fund in developing a policy approach to capital flows and related policies, especially in identifying a view that is representative of the institution. Briefly, the paper says that capital flows can have important benefits and that restrictions on capital flows can have costs. So, countries can benefit from capital flow liberalization. At the same time, capital flows also carry risks, and there is, therefore, no presumption that full liberalization is right for all countries all the time. At the same time, countries with longstanding restrictions would probably benefit from some liberalization.
In managing the risks that are associated with capital flows, the institutional view recognizes that there are circumstances where what we call capital flow management measures, or CFMs, can be useful alongside macroeconomic adjustment. In addition, we considered that right for both recipient and source countries, in other words those that generate capital flows.
In recent years, discussion on these issues has been robust all across the world, as capital flows have grown in size and volatility, and their importance to policy-makers has increased. So, our institutional view is informed by discussions among policy-makers and other international institutions, and it seeks to find common ground among the diversity in the international community.
We intend for the view to be flexible, so it is not set in stone. We recognize that experience and understanding in this area are evolving, so we expect to review and update the view as we go forward, in light of new experience, research, and the views of authorities, opinion-makers, and others.
We also intend for the view to be used with country-specific circumstances in mind, thus not in a rigid way. We intend to cooperate closely with country authorities and other international organizations as we go forward.
With respect to the motivation for the paper—why are we doing this paper—the starting point is that capital flows have increased dramatically in recent years, and they are a key aspect of the global monetary system. Given the sizable benefits, as well as the risks and challenges that are associated with capital flows, the IMF needs to be in a position to provide clear and consistent advice on these issues. And, that end, we need a consistent and clear basis on which to draw.
For example, we should be able to answer consistently questions like: what is the right degree of liberalization of capital flows? What are the right preconditions? When does it make sense to liberalize capital flows? What do you have to do to liberalize capital flows? What sorts of problems do you have along the way? When does it make sense to liberalize capital flows in the long run? And, if a country is not going to fully liberalize in the short or medium term, how can the economy be managed in that context?
Partly with these issues in mind, in 2011 the IMF's International Monetary and Financial Committee called for further work to develop a comprehensive and flexible balanced approach for the management of capital flows. So this paper is, in part, a response to that call.
The IMF’s Independent Evaluation Office has also seen the need for a comprehensive and consistent view on capital flows to provide even-handed advice to member countries. So there is quite a lot of background for where this paper comes from.
Briefly on the main conclusions, while you will have seen already the public information notice, let me just make five or six small points.
First, we want to convey that capital flows can have substantial benefits for countries by enhancing efficiency, promoting financial competitiveness, and facilitating investment. However, at the same, capital flows also carry risks, which can be magnified if there gaps in countries' financial and institutional infrastructure.
Our view is that capital flow liberalization is generally more beneficial and less risky if countries have reached certain levels, or thresholds, of financial and institutional development. But even for countries that have reached such thresholds, or that are relatively advanced, there are still risks, and policy-makers need to remain vigilant to those risks.
Putting together the benefits and the risks, it leads us to the view that there is no presumption that full liberalization is an appropriate goal for all countries at all times. But countries that have extensive and longstanding measures to limit capital flows probably will benefit from further liberalization in an orderly member. For those countries that do choose liberalization, our sense is that it needs to be well planned, timed, and sequenced to ensure that the benefits outweigh the costs.
The paper summarizes what we call our "integrated approach," which has some thoughts on what an appropriate sequencing and an appropriate ordering might be.
In terms of what happens in the short term, it has become clear that rapid capital inflow surges or disruptive outflows can create policy challenges. Thus, the appropriate policy responses involve both countries that receive capital flows and those that transmit capital flows.
For countries that have to manage the risks associated with inflow surges or large 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 (CFMs)—that is, measures that are designed to limit capital flows—can be useful. But these measures should not substitute, in our view, for warranted macroeconomic adjustments.
Finally, policy-makers in all countries should take into account how their policies may affect global economic and financial stability. To this end, cross-border coordination of policies is important to mitigate the riskiness of capital flows.
Just two final points: there's a question of how we will use this institutional view. The proposed view will guide IMF advice to members, and, where relevant, IMF assessments, in the context of our so-called surveillance work.
But the institutional view does not alter members' rights and obligations vis-à-vis the Fund, nor under other international agreements. And it also does not change our approach to Fund-supported programs.
Finally, I just want to repeat that the paper is not intended to lay down a doctrine or to set in place a view once and for all. On the contrary, it represents our thinking at this time, and we expect that it will continue to evolve and be reviewed in light of experience, research, and feedback from others.
MR. OSTRY: I just wanted to add that, as Vivek mentioned, this paper is the culmination of a long period of work at the IMF that began when capital flows started to rebound to emerging markets in late 2009. The IMF produced a series of papers that were discussed by our Executive Board, together with some complementary analytical work that focused on the macroeconomic policy preconditions for the use of capital controls, looking also at the financial stability risks, and how capital controls and macroprudential policies could be combined to manage those risks. And finally, also, the multilateral aspects.
So, you all are probably familiar with those various steps, but I just wanted to mention that this report internalizes the previous work.
QUESTION: Two quick questions. First, what has the Fund not been able to do in Article IVs and other reviews in assessing capital controls that this institutional view will allow the Fund staff to do now?.
Second, it seems like there was some debate at the Board about the merits of distinguishing between residents and nonresidents when it comes to CFMs. What kind of flexibility regarding residency fits into this institutional view?
MR. ARORA: With respect to what the Fund has and has not been able to do, we have always had a need to address policy questions that come up in the context of Article IV and other work with respect to capital flows, because, as Jonathan was saying earlier, they have been an important part of the global economy.
But we have not had a basis on which to do so across the institution, because we have not had one view that is broadly presented as a Fund view.
So, for example, our Independent Evaluation Office, in their report, found that while Fund teams do give advice on capital flows, there is not a basis on which they were able to do so consistently.
And the value of the institutional view is that it will provide country teams with a basis on which they can draw on advice for the capital flow liberalization, managing inflow surges, and managing disruptive outflows. But they will not be bound to do so in a rigid or way because, in the end, the advice would depend a lot on country circumstances and judgments by country teams. But the paper does provide a basis across the institution.
With respect to the residency and non-residency question, there are two main principles to consider. The first one is that, as a multilateral institution, we wanted to emphasize measures that do not discriminate between different parts of our membership. So we think that there should be uniform treatment between residents and nonresidents, as a general preference.
The second principle is effectiveness; that, if the failure to discriminate between residents and nonresidents makes a particular policy ineffective. For example, during a balance-of-payments crisis, if the ability of foreign speculators to access local currency funding is a key source of the instability, then not discriminating between residents and nonresidents would render the policy ineffective. So, in that case, some discrimination could be considered.
In other words, the least discriminatory measure that is effective should be preferred.
MR. OSTRY: Just on the first point rather than the second. You should look at this paper alongside, also, the recent adoption by our membership of the Integrated Surveillance Decision (ISD), which allows IMF assessments of policies to pay attention to the outward spillovers of those policies. This paper, in recognizing that management of capital flows is a shared responsibility of the entire IMF membership—both source and recipient countries— lays out some principles that would inform how surveillance is carried out in the area of capital flows and capital flow management, recognizing that such management is a shared responsibility of both source and recipient countries.
So, together with the ISD, this institutional view allows for a richer discussion and assessment of the policies that may be contributing to capital flow volatility.
MS. RENDAK: If I may add to what my colleagues just said, in particular to clarify how this institutional view is related to what the Fund is doing, particularly in Article IV consultations. As Jonathan just explained, the circumstances under which the IMF looks at capital flow management policies in the Article IV consultations are defined by the framework for Fund surveillance, which is laid out most recently in the new ISD. The circumstances under which bilateral surveillance—which is the surveillance conducted by the Fund vis-à-vis each member country—looks at these policies, are defined by the relevance of the issues to the stability of the individual country. The institutional view will provide an input for IMF staff and management, and the Board, to look at these issues and make these assessments on a consistent basis.
On the multilateral surveillance, the new framework introduced by the ISD, as Jonathan just explained, allows the Fund to look at the issues that are important for the effective operation of the international monetary system, including the spillovers from policies of the individual members for which capital management policies are specifically identified as a possible source of spillover.
QUESTION: How do lessons from the financial crisis affect and impact the analysis in this paper? Compared with three years ago, is the general view of the IMF on capital flows more leaning towards liberalization or control?
MR. ARORA: The financial crisis highlighted the risks of capital flows, especially in environments where financial regulation and supervision had not kept pace with the ability to manage the risks of large capital flows.
I can point you to various parts of the paper. For example, if you look at, paragraph 19 it suggests that, while previously we thought of the risks of capital flows being largely associated with countries that were newly liberalizing, it became clear, from the financial crisis, that even countries that have long benefitted from capital flows, which are quite sophisticated at managing them, can also be vulnerable to financial risks. This is the case if their supervision and regulation has not prevented unsustainable asset bubbles and booms, or the risks associated with cheap external financing. The second point I would make, though, is that the lesson—in the context of this paper—from the financial crisis, is not that countries should close their capital accounts. Rather, the lesson we draw is that even with open capital accounts, the job is not yet done. Financial supervision and regulation needs to continue to be strengthened, and needs to remain vigilant to the risks associated with capital flows.
These are the two main points I would make with respect to the financial crisis.
With respect to whether the IMF is more or less in favor of liberalization, three years ago we did not have a Fund view on liberalization of capital flows. So we may have expressed views in different contexts, but there was not an institutional view.
But with respect to the institutional view itself, it is not so much a pro or anti liberalization of capital flows. It is intended to be a pragmatic view, based on the benefits and the costs of capital flows, and to inform our advice in member countries in a way that would be helpful for maximizing the benefits and managing the risks.
QUESTION: If this is an official endorsement of principles that are going to guide the IMF’s view on capital flows, and if it is not mandatory, how do you convince countries to accept them?
The IMF is talking about more coordination among recipient and source countries. How do you see your role within that? How would you also, again, convince countries to take measures?
MR. ARORA: Yes, the institutional view is not mandatory. It is a basis on which we can provide advice to countries and draw on when in the context of our surveillance exercise. There may be other occasions in which the IMF is required to provide an assessment of policies, including capital flow policies. So this view would provide a basis on which we can draw to provide such assessments.
Like with all our advice in surveillance cases, the value to country authorities will be tested by whether this institutional view meets their needs, in terms of providing useful advice for a key policy issue that they are facing. We are not providing a mandatory, rule-book approach that we are asking every country to follow. On the contrary, when there are country-specific challenges from capital flows, then the IMF needs to be in a position to have a consistent basis for advice.
MR. HABERMEIER: I just wanted to confirm that this institutional view does not give rise to any new obligations for Fund members.
In terms of how influential this view would be, I would emphasize in particular that it is aimed not only at the recipients of capital flows, but also at the source countries, and that includes the major advanced economies. In that respect, what is important is that we see a role for those advanced economies also to take account, as they reform their regulatory and supervisory systems, of the effect of those regulatory changes, and to design those regulatory changes in a way that has a beneficial effect on the operation of the international monetary system and, in particular, on the riskiness of capital flows.
So, this has been, for example, treated in some earlier papers the IMF has published. We try to exercise our influence on our member countries through a variety of modalities, such as last year the spillover reports. We had an external sector report. We are influencing the discussion, also, through our participation in the Financial Stability Board and other bodies internationally.
So, hopefully, this body of work will contribute to a smoother operation of the international monetary system, and to containing also the spillovers from source countries.
MR. OSTRY: Coordination means different things to different people. In particular, how explicit the coordination is, varies quite a bit, with the Louvre and Plaza accords being examples of quite explicit coordination.
What we have in mind here is something much softer. In line with the ISD, it is enjoining countries to choose policies that are in line with their domestic interests, but when contemplating a number of different options, countries should choose policies that have the least adverse spillovers across the global system. And that is in line with the ISD, and also with the principles of coordination that are in this paper.
MS. RENDAK: To add another perspective to this issue of international coordination, as is described in the paper, the IMF is not the only institution that works on capital flows issues. There are a number of other legal frameworks that feature prominently capital flows and policies to manage them, including the OECD and the EU. There are also bilateral investment and other agreements where these issues are dealt with.
So, another aspect of the international cooperation that we foresee in the paper, and that we will take up going forward, is that the IMF will continue to work closely with other organizations, entities, and bodies. In particular, the institutional view will help developing some more universal and consistent understandings on these issues, also within the frameworks of other institutions. Just to give an example that is already in the paper, some bilateral agreements deal with this issue, but not necessarily from the perspective of the stability of the international monetary system, and global financial and economic stability.
QUESTION: You mentioned some countries which have had longstanding open capital accounts and have nonetheless experienced destabilizing capital inflows and outflows. Obviously, those in the euro zone leap to mind. Do you think that, notwithstanding the EU rules on movements of capital, controls on capital might have stopped those imbalances building up within the euro zone, and might have been profitably employed—as indeed they were in Iceland—in order to combat the crisis when it came?
MR. ARORA: The emphasis that we place is on financial supervision and regulation, as I said. There are two considerations to keep in mind. The first is that countries have obligations and commitments under existing agreements. So, within the EU, there is a strong commitment for liberalization of capital flows, and we do not intend in any way to supplant that. Going forward that could be a key point from the paper.
Secondly, the advice in the paper is intended to say how, within the existing frameworks, countries can better manage the benefits and risks of capital flows. So, in the context of a country that is committed to open capital flows, and whose whole financial system and institutional structure is set up in a very open way, we would emphasize that the financial supervision and regulation needs to keep pace with capital flows and that supervisors need to remain vigilant to the risks associated with capital flows. Thus, even if countries are very advanced, and have sophisticated institutions and financial structures, they still remain vulnerable.
Finally, we do make a point in the paper that a key consideration in considering the adoption of capital controls, or CFMs, is effectiveness, and that in countries that are more advanced, or which are larger, the ability of CFMs to be effective is probably less. So even if conditions exist for the imposition of CFMs, like a crisis, or a surge of inflows, and other macroeconomic tools are limited, if the CFMs, themselves, are judged to be ineffective, then that is a strong reason not to use them.
MR. OSTRY: Not speaking specifically about Europe, but as is implicit in the use of the jargon "CFMs," there are both prudential policies and capital-control type policies that are included in that category. And while the jury is still out on the effectiveness issue, there is some work that we have done over the past couple years that suggests that going into this crisis, countries that had had somewhat more restrictive policies (capital controls or prudential policies) in the good times were somewhat more resilient when the sudden stop and the global financial crisis took place.
So there is some evidence linking not extreme, but marginal increases in the extent of prudential regulation and capital controls, to greater economic resilience in the wake of the crisis.