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Entries tagged "capital control"

Getting Around Geithner

March 4, 2012 ·

I've been trying to get the Obama administration to come out of the Dark Ages on the subject of capital controls for three years. The light, however, seems to be shining only outside Washington.

I know capital controls aren't exactly issue No. 1 on Americans' minds. But these tools for managing volatile hot money flows have saved countless families around the world from economic disaster. And while they're most frequently used in developing countries, promoting financial stability anywhere is in the interest of all of us.

Tim Geithner is stuck in the Dark Ages. Photo by U.S. embassy in New Delhi.So in the wake of the worst financial crisis in 80 years, I thought it would be a no-brainer for the U.S. government to give up its longstanding policy of banning capital controls through trade agreements. The North American Free Trade Agreement and dozens of other U.S. treaties severely restrict our trade partners' ability to use capital controls. If governments break the rules, foreign investors can sue their pants off in international tribunals.

In 2009, I was appointed to an official advisory committee to the Obama administration on investment policy, where I talked myself blue in the face about the need for a rethink on capital controls. To pump up the volume, I partnered with Professor Kevin Gallagher of Boston University to organize more than 250 economists to sign a letter to the administration, urging trade reforms to allow capital controls.

Many fancy economists were eager to sign -- a Nobel Prize winner, a former finance minister and Central Banker, a Harvard department head, etc... We got coverage in the New York Times and Wall Street Journal, as well as the opportunity to present the letter to Treasury officials and trade negotiators.

Finally, we received a reply from Treasury Secretary Timothy Geithner. The administration would "seek to preserve" current policy, he said, since, in his view, governments have sufficient alternatives to capital controls to deal with volatility.

Ouch. Geithner made the International Monetary Fund look like a relative beacon of progressive enlightenment. After decades of blanket opposition, the IMF now endorses capital controls on inflows of speculative capital under certain circumstances. They have recommended outflows controls in a number of countries facing capital flight, such as Iceland, and are supporting inflows controls to prevent speculative bubbles in emerging market countries.

What about Geithner's argument that there are plenty of other policy tools to deal with financial volatility? An IMF paper from 2010 went through the alternatives and concluded that in certain circumstances capital controls are still needed.

Fortunately, there are ways to get around Geithner. The greatest hope lies in other countries that may put up a fight over this issue. The Obama administration is negotiating a Trans-Pacific trade agreement with eight other governments: Australia, Brunei, Chile, Malaysia, Peru, New Zealand, Singapore, and Vietnam. Several of these have used capital controls effectively in the past.

For example, throughout most of the 1990s, Chile required a percentage of all foreign investments to be deposited in the central bank for a year, helping to prevent rapid capital flight. Malaysia imposed controls on capital outflows at the height of the Asian financial crisis in 1998. Nobel economist Joseph Stiglitz has written that this allowed Malaysia to "recover more quickly with a shallower downturn and with a far smaller legacy of national debt."

More than 100 economists from countries in the Trans-Pacific trade talks have signed a new letter urging more flexibility on capital controls. This time, signatories include prominent scholars from six of the nine participating governments, including well-known free trade supporter Professor Jagdish Bhagwati of Columbia University and former IMF officials Olivier Jeanne of Johns Hopkins University and Arvind Subramanian of the Peterson Institute for International Economics. The letter will be delivered to each of the nine governments on the eve of a big March 1-9 negotiating round in Melbourne, Australia.

This isn't the only fix needed in our trade agreements. But if we can't move beyond the Dark Ages belief in the wonders of unfettered financial flows, it's hard to imagine winning much else in the way of enlightened trade reforms.

Crikey! Australia Shocks Corporate America on Trade

March 2, 2012 ·

The Australian government doesn’t like it when global tobacco giants can sue them over public health laws. Corporate America finds this utterly unreasonable.

President Barack Obama and Australian Prime Minister Julia Gillard.Thirty-one U.S. corporate lobby groups, from the Business Roundtable to the National Potato Council, sent a letter to President Obama this week, urging him to give Australia a good smackdown.

The Aussies’ offense? They have refused to accept trade rules that allow foreign investors to sue governments in international tribunals. Known as “investor-state” dispute settlement, these rules are in every U.S. trade agreement negotiated in the past 20 years – except the 2005 U.S.-Australia pact.

The Land Down Under stood up to U.S. corporate goliaths and their representatives in the U.S. Trade Representative’s office that time around. But the issue has come up all over again because the two countries are negotiating a new trade pact with seven others, called the Trans-Pacific Partnership. Australia has reiterated its opposition to these so-called “investor rights” in this broader trade deal.

If anything, the government’s opposition has hardened since its last go-round with U.S. trade negotiators. That’s because Australia is now the target of a high-profile investor-state case. Philip Morris, of the Marlboro empire, filed a suit against Australia last year, demanding compensation for that country’s plain packaging laws for cigarettes. Oops – while Australia had kept investor-state out of the U.S.-Australia trade deal, it allowed it in some other treaties. Philip Morris simply used a subsidiary in Hong Kong to file the claim under a bilateral treaty between that nation and Australia.

In a statement surprisingly lacking in the usual bureaucratic mumbo jumbo, the Australians made clear they weren’t about to expand their vulnerability to such lawsuits by accepting investor-state in the Trans-Pacific Partnership.

Corporate America’s hair has been on fire ever since. In the lobby group’s letter to Obama, they warn ominously that “Australia’s rejection of investor-state dispute settlement is not only thwarting the ability of the TPP negotiations to produce strong enforcement outcomes, it is also having a corrosive effect on the level of ambition and other key aspects of the TPP negotiations. If Australia were able to extract such a major exemption, other countries would press forward to seek their own major exemptions from core commitments.” 

Translation:  they fear if the United States goes all soft on the Australians on investor-state, the other countries will smell blood and demand similar rules that are pro-public interest, but corporate-unfriendly. Several of the other governments are already attempting to stand up to U.S. pharmaceutical company proposals that would reduce access to affordable medicines.

Another hot-button issue is capital controls, which include various measures designed to manage the flow of volatile “hot money” across borders. More than 100 economists from TPP countries signed a statement this week urging negotiators to allow governments to use this proven tool for preventing and mitigating financial crisis. Seventeen corporate lobby groups have argued in another letter that permitting U.S. trade partners to support financial stability through the use of capital controls would undermine everything from U.S. jobs to national security. Despite growing consensus among economists that such controls are legitimate policy tools, it is standard U.S. trade policy to prohibit their use and allow investor-state claims against governments that violate these restrictions.

Besides the United States and Australia, others involved in the Trans-Pacific talks are:  Brunei, Chile, Malaysia, Peru, New Zealand, Singapore, and Vietnam. Their 11th round of negotiations is taking place in Melbourne, Australia from March 1 to 9. Let’s hope the Australian team that is taking on Corporate America can make the most of their home turf advantage.

How Obama is to the Right of Reagan on Trade

September 8, 2011 ·

This blog post was originally published in Triple Crisis.

While doing some archaeological digging into old treaties, I discovered that the Reagan revolutionaries were relative softies on at least one issue — government meddling in capital markets.

The vast majority of the 52 existing U.S. trade agreements and bilateral investment treaties forbid governments from putting controls on capital flows. But buried in the annexes to four Reagan-era treaties, I found exemptions allowing trade partners to apply such controls during financial crises. Capital controls are various measures including (gasp!) taxes designed to prevent speculative bubbles or rapid capital flight.

Tea Partiers should give Obama credit for adhering more strictly to free market orthodoxy on this issue. His officials have made clear they are pushing for a ban on these crisis prevention tools in the Trans-Pacific Partnership (TPP), the first trade deal to be negotiated under Obama’s watch. The eighth round of these nine-party talks is set for September 6-15 in Chicago.

Earlier this year, more than 250 economists sent a letter to the administration urging a re-think. “Given the severity of the global financial crisis and its aftermath, nations will need all the possible tools at their disposal to prevent and mitigate financial crises,” they wrote. Treasury Secretary Timothy Geithner responded by arguing that this was unnecessary because governments could find other ways to deal with volatility. USTR spokeswoman Carol Guthrie confirmed in a Bloomberg interview that U.S. negotiators expect to push for open capital-transfer rules in the Trans-Pacific Partnership negotiations.

That rigid position places the Obama administration to the right not only of Reagan, but also both Bush presidencies and the International Monetary Fund.

After decades of blanket opposition, the IMF now endorses capital controls on inflows of speculative capital under certain circumstances. They have recommended outflows controls in a number of countries facing capital flight, such as Iceland and Ukraine. And they have been even more broadly supportive of emerging market countries that are using controls on inflows to prevent speculative bubbles.

In Brazil, for example, where hot money has driven up the value of the real, the government has imposed a one percent tax on currency derivatives and a six percent tax on foreigners’ purchases of bonds. On August 3, the IMF executive board described the country’s use of capital controls as an “appropriate” tool to manage foreign investment inflows.

A recent IMF report on one of the countries that received a Reagan exception — Bangladesh — credits capital controls with preventing the “global flight to safety” that left so many poor economies in shambles after the crisis erupted in 2008. Bangladesh instead doubled its central bank reserves during that period.

Reagan also allowed crisis-time exceptions in investment treaties with Turkey and Egypt, while a 1985 trade agreement with Israel has no restrictions whatsoever. All three have used these policies in the face of financial volatility.

President George H.W. Bush was no fan of capital controls, but he did allow limited exceptions in the North American Free Trade Agreement and bilateral investment treaties with Sri Lanka and Tunisia. His son’s administration beat back attempts by Singapore and Chile to obtain similar waivers, but softened its stance with South Korea, a country scarred by uncontrolled capital flight in the late-1990s crisis.

Aside from the handful of exceptions, 44 U.S. agreements prohibit capital controls even during a financial collapse. According to the IMF, these deals are outliers. The global norm is to “provide temporary safeguards on capital inflows and outflows to prevent or mitigate financial crises, or defer that matter to the host country’s legislation.” Indeed, as I’ve detailed in this new study, other TPP countries’ existing agreements include broad safeguards.

What can happen without such safeguards? Global corporations and financiers have the power to sue governments that resort to capital controls and demand compensation, even as a nation is reeling from severe economic catastrophe. That’s something Federal Reserve Board member Daniel Tarullo has described as not only “bad financial policy and bad trade policy,” but also “bad foreign policy.”

And yet the Business Roundtable, U.S. Chamber of Commerce, Financial Services Roundtable, and 14 other business groups have called on the administration to reject proposals to permit capital controls under trade agreements.

Thus, while Obama might seem lonely standing so far out on the anti-regulation end of the spectrum on this issue, if he sticks to his guns, he’ll have lots of admirers on Wall Street and in the executive suites.

Sarah Anderson directs the Global Economy Project at the Institute for Policy Studies and served on the Investment Subcommittee of the U.S. State Department’s Advisory Committee on International Economic Policy in 2009.

Decoding the G-20 Drama

November 12, 2010 ·

There was a big brouhaha at the G-20 summit this week over what they’re dryly calling “global trade imbalances.”

In the simplest terms, what this boils down to is this: Americans buy too much stuff from China. Chinese stuff is artificially cheap because of currency manipulation, but also because of labor repression that keeps wages down. And because wages are so low, Chinese people don’t buy very much stuff, so the money from exports piles up.

China is expected to have a trade surplus of $270 billion this year, while the United States is expected to have a trade deficit of $466 billion. Other countries have trade imbalances too, but these are the biggies.

The trade deficit hurts the U.S. economy because money spent on imports is money not spent on U.S. products that support jobs in this country. Also, to fund this deficit, the United States has to borrow money from abroad. And if the deficit keeps growing, the day may come when foreign investors are no longer willing to lend.

Last month, Treasury Secretary Timothy Geithner tried to get the other G-20 governments to agree to limit their trade imbalances to no more than 4 percent of GDP. How did he pick 4 percent as the target? Well, it’s probably no mere coincidence that China’s surplus is expected to exceed that mark this year (4.7 percent), while the U.S. deficit is expected to fall below it (3.2 percent). Geithner was basically told to take a hike.

So what’s a U.S. policymaker facing a nearly 10 percent unemployment rate to do? One option would be to reinvigorate U.S. manufacturing through targeted public investment. You could pay for it by increasing taxes on the ultra-rich or by taxing financial speculation. Sadly, the outcome of the mid-term election likely put the kibosh on that kind of stimulus spending, at least for the next two years.

Instead, the Fed, which doesn’t have to worry about Tea Party opposition, did what’s called “quantitative easing” — another unnecessarily abstract term that basically means they’re printing money, to the tune of $600 billion. The Fed's idea was that all this cash will lubricate the wheels of the American economy, get credit flowing again, and create jobs.

This is largely based on faith. As Brazilian Finance Minister Guido Mantega put it, “It doesn’t help things to be throwing dollars from a helicopter.” Brazil and other fast-growing emerging markets are worried that the Fed-created cash, instead of financing U.S. job creation, will slosh into their economies, where interest rates are higher. This would drive up the value of their currencies, making their exports less competitive. Wolfgang Schaeuble, the finance minister of Germany, which is a trade surplus country like China, declared the Fed’s action “clueless.”

Such tough jabs are unusual among finance ministers. What seemed to really get their blood boiling was the fact that the Fed announced the action without giving the other governments as much as a heads up. This week’s G-20 summit in Seoul, Korea concluded without any meaningful agreement, other than a timid pledge to “refrain from competitive devaluation of currencies.” So much for the G-20 fulfilling its self-declared status as the “premier forum for international economic cooperation.”

Meanwhile, to deal with the surge of short-term “hot” money that could drive up the value of their currencies, Brazil, Taiwan, and several other countries are imposing various forms of controls on capital inflows. However, this is not really an option for the 52 countries that have signed U.S. trade or investment treaties which severely restrict the use of this policy tool. If they violate these restrictions, they run the risk of facing expensive lawsuits from affected foreign investors.

Hopefully the Obama administration will now recognize that bans on capital controls are outmoded and work to revise them. As Dani Rodrik, of Harvard University puts it, “capital controls are now orthodox.”

While giving governments the authority to use policy tools at the national level to control capital flows is critical, this patchwork approach is not ideal. We need a new international monetary system that can help prevent the kind of “currency wars” we’re seeing today. That’s something French President Nicolas Sarkozy plans to put at the center of the G-20 agenda now that he has taken over the presidency of that body for the next year. Let’s hope he can get the other leaders to stop squabbling and take the challenge seriously.