Economists Unite Around Once-Demonized Capital Controls

Who says economic policy has to be polarizing? In a remarkable sign of consensus, more than 250 economists across the ideological spectrum have signed a letter to the Obama administration in support of capital controls.

Until quite recently, this would have been unthinkable. For decades, the International Monetary Fund and the U.S. government led a crusade to eliminate capital controls, which include taxes and other measures to manage cross-border “hot money” flows.

As part of a broader liberalization agenda, the IMF used loan conditions and the U.S. government used trade and investment agreements to try to end such policies. U.S. officials even insisted that trade rules allow foreign investors to sue governments in international tribunals over violations of their “rights” to free capital mobility.

Then, after several countries used capital controls effectively to insulate themselves from the ravages of the 1990s financial crises, the IMF’s opposition began to soften. And since the 2008 financial meltdown, the IMF has actually recommended such controls in certain circumstances, such as to prevent massive capital flight in Iceland or to stem assest bubbles in emerging markets.

The U.S. government, meanwhile, has carried on the old crusade and now has trade or investment agreements with 52 nations that prohibit capital controls.

In the statement delivered to to the Obama administration, economists are urging the Obama administration to end these outmoded policies. Initiated by the Institute for Policy Studies and the Global Development and Environment Institute at Tufts University (GDAE), the letter carries endorsements from:

  • Former IMF Economists: e.g., Arvind Subramanian, now a Senior Fellow at the Peterson Institute for International Economics, and Olivier Jeanne, a Professor at Johns Hopkins University.
  • Free Trade Supporters: e.g., Center for Global Development President Nancy Birdsall and her colleague Kimberly Elliott, who, while critical of capital control restrictions, have been generally supportive of U.S. trade policies, from the Central America pact of 2005 to the pending U.S.-Korea deal.
  • A Nobel Laureate: Joseph Stiglitz.
  • Former High-ranking Government Officials: Harvard’s Ricardo Hausmann, a former Inter-American Development Bank Chief Economist and Minister of Planning of Venezuela; Y. Venugopal Reddy, former Governor of the Reserve Bank of India; and José Antonio Ocampo, former Finance Minister of Colombia.

As the letter points out, this is a timely issue since “in recent months, a number of countries, from Thailand to Brazil, have responded to surging hot money flows by adopting various forms of capital regulations.”

The Obama administration has ample opportunities to bring a fresh approach to ongoing negotiations in its:

    Making sure these deals don’t prevent governments from using sensible capital controls would be one important part of a pro-worker, pro-environment, pro-democracy trade reform agenda. If we’ve learned anything from the current crisis, it’s that we’re living in a globalized financial system, where chaos in one part of the world can be devastating for businesses and workers elsewhere.