WEBVTT - Why the IMF Changed Its Views on Capital Controls 0:00:10.760 --> 0:00:14.640 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:14.680 --> 0:00:20.360 I'm Joe Wisnal and I'm Tracy Halloway. So, Tracy, evolution 0:00:20.720 --> 0:00:24.120 of economic thought is a big topic for us, especially 0:00:24.160 --> 0:00:27.280 this year. UM, a lot of a lot of discussion 0:00:27.320 --> 0:00:31.480 and about monetary policy, fiscal policy. Uh, one of our 0:00:31.520 --> 0:00:34.960 recurring themes, no doubt. Yeah, I mean it feels like 0:00:35.200 --> 0:00:39.479 a lot of these conversations had begun even before, but 0:00:39.640 --> 0:00:42.400 this year is kind of the one that makes everyone 0:00:42.479 --> 0:00:45.760 start taking them or at least talking about them seriously. 0:00:45.840 --> 0:00:50.800 So things like modern monetary theory, once considered very very heterodox, 0:00:50.920 --> 0:00:53.840 are now I mean now you see certain US politicians 0:00:53.880 --> 0:00:57.240 talking about it. Uh, the idea of a greater role 0:00:57.320 --> 0:01:01.160 for fiscal policy alongside money policy. There are a lot 0:01:01.320 --> 0:01:05.399 of standard thoughts that are being overturned or at the 0:01:05.480 --> 0:01:10.200 beginning of being overturned maybe right some some stage of evolution. 0:01:10.319 --> 0:01:12.720 We haven't really I mean, we've done a little bit, 0:01:12.720 --> 0:01:16.240 but we haven't really taken this sort of theme of 0:01:16.959 --> 0:01:21.800 evolution however, within the context of say emerging markets, or 0:01:21.840 --> 0:01:23.720 we haven't really done as much on it. We've done 0:01:23.720 --> 0:01:27.160 a little actually, but not that much yet. Yeah. So 0:01:27.240 --> 0:01:31.360 emerging markets this year, we're pretty interesting clearly under a 0:01:31.360 --> 0:01:33.479 lot of stress because these are the countries that are 0:01:33.640 --> 0:01:38.520 dealing with a huge case load of the virus, the coronavirus, 0:01:38.640 --> 0:01:42.920 and also dealing with the economic fallout um of everything 0:01:42.920 --> 0:01:44.800 that's going on in the rest of the world. So 0:01:44.880 --> 0:01:46.959 it feels like they're sort of getting this double whammy 0:01:47.080 --> 0:01:50.480 of maybe not having as great health systems as a 0:01:50.480 --> 0:01:53.240 lot of the developed world, but still having to deal 0:01:53.520 --> 0:01:57.640 with the economic impacts. So, you know, back in March, 0:01:57.840 --> 0:02:00.720 remember like e M looked like it was very much 0:02:00.760 --> 0:02:04.840 in trouble. Yeah, you know, I really do think and 0:02:05.040 --> 0:02:07.320 it's not exactly what we're gonna be talking about today, 0:02:07.360 --> 0:02:10.079 but I do think one of the themes from that's 0:02:10.120 --> 0:02:14.320 going to be interesting in retrospect and with pretty important implications, 0:02:14.760 --> 0:02:20.000 is whether various EMS have more policy flexibility that previously appreciated. 0:02:20.320 --> 0:02:22.920 Whether it's their ability to do quantitative easing, whether it's 0:02:22.960 --> 0:02:26.560 their ability to run fiscal deficits. It's possible that after 0:02:28.280 --> 0:02:31.720 UM people might start to think that some e M 0:02:31.760 --> 0:02:35.320 s might have more more space to engage in countercyclical 0:02:35.320 --> 0:02:39.160 policy than previously appreciate. It. Oh, absolutely, and we're already 0:02:39.240 --> 0:02:41.600 sort of seeing that because Indonesia, I mean, who would 0:02:41.600 --> 0:02:44.120 have thought a few years ago the Indonesia would be 0:02:44.160 --> 0:02:47.840 the first central bank to do direct financing UH and 0:02:48.000 --> 0:02:51.400 in that's entirely possible. So we are seeing some of 0:02:51.480 --> 0:02:57.440 the Yeah, so we are seeing some emerging markets experimenting 0:02:57.440 --> 0:03:01.320 with new types of policy. An are a big question, 0:03:01.600 --> 0:03:05.000 of course, and this is something that Yeah, it is 0:03:05.000 --> 0:03:10.720 a constant theme in discussions relate relate to UH control 0:03:10.840 --> 0:03:15.400 of the capital account, limiting hot money or money coming 0:03:15.440 --> 0:03:20.120 in coming out UM. The degree to which h e 0:03:20.320 --> 0:03:24.680 M s should keep a tight leash on capital inflows 0:03:24.760 --> 0:03:28.000 and outflows is something that always gets debated, and there's 0:03:28.040 --> 0:03:31.760 always sort of a rethinking about what is the appropriate 0:03:31.840 --> 0:03:37.240 degree to which such things should be tightly controlled. Yeah, 0:03:37.320 --> 0:03:39.720 and I think I mean, for years and years and years, 0:03:39.760 --> 0:03:45.000 it was pretty clear that the international political system, I 0:03:45.040 --> 0:03:49.680 guess had a bias against capital controls. You know, they 0:03:49.720 --> 0:03:52.680 wanted liberalization of the current account, they wanted money to 0:03:52.720 --> 0:03:57.200 flow freely between countries, and we've seen at various points 0:03:57.240 --> 0:03:59.840 in time that that's not always in the best intro 0:04:00.240 --> 0:04:03.120 of the country itself. So you know, for instance, if 0:04:03.120 --> 0:04:05.400 you're an emerging market somewhere, and suddenly you've got this 0:04:05.520 --> 0:04:08.800 influx of hot money from abroad because people are looking 0:04:08.840 --> 0:04:11.520 for yield and they pour it all into your housing 0:04:11.560 --> 0:04:15.000 market or something like that that might not actually be 0:04:15.200 --> 0:04:17.680 what you want at that particular moment in time, an 0:04:17.680 --> 0:04:21.560 overheated housing market. So that's been an ongoing debate, and 0:04:21.720 --> 0:04:24.440 I think you're right, we're starting to see some discussion 0:04:24.480 --> 0:04:28.400 of it again. Provides another sort of catalyst to look 0:04:28.480 --> 0:04:32.560 into this topic. Exactly right. Well, we have two very 0:04:32.600 --> 0:04:36.400 great guests. I'm excited to chat with him about this topic. 0:04:36.440 --> 0:04:39.159 We're going to be speaking with a percosh Lengani. He's 0:04:39.160 --> 0:04:42.400 assistant director and senior personnel manager in the i m 0:04:42.480 --> 0:04:46.920 f S Independent Evaluation Office. Well Is trurom Balis Supermania 0:04:46.920 --> 0:04:50.000 and a senior research officer at the i e O 0:04:50.120 --> 0:04:52.719 and I m F excited about talking to both of 0:04:52.720 --> 0:04:56.800 them on this topic. They both recently done work on this. Uh. Prakash, 0:04:56.880 --> 0:04:58.920 thank you very much for joining us. Thanks show, It's 0:04:58.960 --> 0:05:00.359 it's great to be on this show over with you 0:05:00.400 --> 0:05:03.640 and Tracy have. I've really enjoyed listening to your podcast. Oh, 0:05:03.720 --> 0:05:07.400 thank you and sure wrong thank you as well. Hi. Guys, 0:05:07.440 --> 0:05:09.680 how are you doing? Good to be on this podcast. 0:05:10.040 --> 0:05:12.159 Very kind of both of you to say, well, let's 0:05:12.160 --> 0:05:14.880 get started, percush if you want to kick us off. 0:05:15.080 --> 0:05:18.240 You know, we talked about evolution of thought. But for 0:05:18.320 --> 0:05:22.360 those unfamiliar, I include myself in the category just to 0:05:22.400 --> 0:05:26.080 be clear. But for those unfamiliar, what has been the 0:05:26.200 --> 0:05:31.280 sort of orthodox standard I am F view on how 0:05:31.320 --> 0:05:35.240 to think about capital control? Okay, well, I don't want 0:05:35.279 --> 0:05:38.880 to take you too far back into history, but but 0:05:39.920 --> 0:05:43.920 you know, a pre orthodox view, actually around the time 0:05:43.960 --> 0:05:48.320 that the IMF was created, one espoused by Keynes and 0:05:49.040 --> 0:05:52.360 Harry dextra White at the U. S. Treasury, was that 0:05:52.440 --> 0:05:56.080 you could have free trade, but you needed to actually 0:05:56.080 --> 0:05:59.320 have capital controls. So when the I m F was founded, 0:06:00.160 --> 0:06:04.599 the prevailing viewers that you actually needed capital controls, that 0:06:04.680 --> 0:06:09.159 you really couldn't have the instability that the free movement 0:06:09.200 --> 0:06:13.560 of foreign capital might bring about. But then you had 0:06:13.560 --> 0:06:17.160 the Berlin volved falling and capitalism was the only game 0:06:17.200 --> 0:06:21.119 in town, and everyone thought, look, what this is telling 0:06:21.200 --> 0:06:25.960 us is that you know, capitalism rules, and we should 0:06:26.000 --> 0:06:30.320 just have freedom of mobility, not just of trade the 0:06:30.360 --> 0:06:34.240 way we've been having, but of the mobility of capital. 0:06:34.920 --> 0:06:40.200 And so you know, in the early nineties, the U. S. 0:06:40.240 --> 0:06:43.880 Treasury and the i m F, I think, for understandable reasons, 0:06:43.920 --> 0:06:49.800 given the big events that had just happened, took the 0:06:49.880 --> 0:06:52.880 view that, you know, that emerging markets and others should 0:06:52.880 --> 0:06:57.520 be opening up to foreign capital and that they should 0:06:57.520 --> 0:07:01.719 be having open capital mark it's and so this was 0:07:01.800 --> 0:07:05.760 kind of the view as Tracy was describing, sort of 0:07:06.200 --> 0:07:09.760 as of as of twenty years ago, which is around 0:07:09.800 --> 0:07:12.400 the time that I I moved from the from the 0:07:12.400 --> 0:07:17.000 FED to the I m F. So that's that's that's 0:07:17.040 --> 0:07:20.960 where things were. I mean that definitely as as Tracy 0:07:21.040 --> 0:07:25.040 was saying, sort of a bias that said, you know, 0:07:26.000 --> 0:07:28.640 capital should be free to move across countries. You really 0:07:28.640 --> 0:07:32.840 should not have capital controls. So I'm curious twenty years 0:07:32.840 --> 0:07:37.000 ago was there much discussion of the pros and cons 0:07:37.040 --> 0:07:41.040 of capital controls or to what degree was it considered 0:07:41.520 --> 0:07:46.640 economic orthodoxy that you wanted free flow of money across borders. 0:07:48.320 --> 0:07:52.920 I think there were always some skeptics of the view 0:07:53.000 --> 0:07:59.280 that allowing capital to flow freely across national boundaries would 0:08:00.040 --> 0:08:04.520 always bring about the benefits to the recipient countries. But 0:08:04.840 --> 0:08:08.200 I would say that, you know, sort of after the 0:08:08.240 --> 0:08:10.320 fall of the Berlin Wall, there was a there was 0:08:10.360 --> 0:08:13.679 a sense of euphoria that we needed to be open 0:08:13.800 --> 0:08:18.440 to all forms of capitalism, including sort of financial capitalism 0:08:18.440 --> 0:08:22.000 and financial globalization. So there were people like you know, 0:08:22.080 --> 0:08:26.600 Joe Stiglitz and Danny Roderick who were a bit more skeptical, 0:08:26.920 --> 0:08:30.040 or I would say quite a bit skeptical that that 0:08:30.160 --> 0:08:36.240 foreign capital would deliver benefits. But I think that most 0:08:36.280 --> 0:08:38.440 of us, I think it's sort of drunk the kool 0:08:38.480 --> 0:08:42.640 aid and and we're very much in favor of of 0:08:42.640 --> 0:08:46.560 of having sort of open capital markets. I mean, I 0:08:46.600 --> 0:08:51.680 certainly was in that camp twenty years ago. So this 0:08:51.840 --> 0:08:56.000 might be another sort of remedial question. But I understand 0:08:56.080 --> 0:09:02.840 an extremely high abstract level what open capital accounts mean 0:09:03.000 --> 0:09:06.040 and free flow of capital, But what does that actually 0:09:06.080 --> 0:09:09.160 mean capital controls? So if you say a country has 0:09:09.240 --> 0:09:13.640 implemented capital controls or maybe a country ought to consider them, 0:09:13.720 --> 0:09:17.559 what are we typically talking about in practice in terms 0:09:17.559 --> 0:09:20.000 of creating an impediment to that free flow? Yes, so 0:09:20.040 --> 0:09:26.160 I think we're talking about things that would discriminate against 0:09:26.800 --> 0:09:33.880 foreigners versus domestic residents. We're talking about things that would say, 0:09:34.040 --> 0:09:37.640 if you want to bring in capital for a long 0:09:37.679 --> 0:09:40.480 period of time two or three years, we will give 0:09:40.520 --> 0:09:43.440 you the following tax treatment. But if you want to 0:09:43.480 --> 0:09:46.840 bring in capital just for a short amount of time, 0:09:47.000 --> 0:09:49.560 you have to pay a higher tax. So you know, 0:09:49.720 --> 0:09:54.200 the question is I think most people recognize that there 0:09:54.320 --> 0:09:57.240 is sort of a pecking orders, as you and Tracy 0:09:57.320 --> 0:10:00.840 were kind of discussing already. I'm among the kinds of 0:10:01.280 --> 0:10:03.680 flows of capital that you know. There are some like 0:10:03.760 --> 0:10:08.360 foreign direct investment, where I think the benefits are much 0:10:08.400 --> 0:10:12.480 more easy to demonstrate, and there is the hot money 0:10:12.480 --> 0:10:15.240 that you guys were talking about, where it's not very 0:10:15.320 --> 0:10:18.800 clear what the benefits are. And you know, no less 0:10:18.800 --> 0:10:22.240 a person than stan Fisher. I remember hearing about what 0:10:22.240 --> 0:10:25.280 he said at Jackson All conference where he said Israel's governor, 0:10:25.320 --> 0:10:27.719 he said, I don't know what possible benefits that can 0:10:27.760 --> 0:10:31.440 be for us from short term capital flows. And you know, 0:10:31.480 --> 0:10:36.480 this is Stan Fisher, this is not, you know, just 0:10:36.480 --> 0:10:40.800 just some French French person. So I think, yeah, exactly, 0:10:41.640 --> 0:10:45.040 I think that that the impediments we're talking about are 0:10:45.400 --> 0:10:52.000 sort of discriminatory taxes to discourage foreign capital when it 0:10:52.120 --> 0:10:56.280 is viewed that it is not serving the functions described 0:10:56.440 --> 0:11:02.600 that that was subscribed, or trying to put impediments that 0:11:02.640 --> 0:11:06.320 would try to force the foreign capital into longer duration 0:11:07.080 --> 0:11:11.280 investments rather than hot money. Can you talk a little 0:11:11.280 --> 0:11:17.199 bit about what impact capital controls can have on monetary 0:11:17.240 --> 0:11:21.160 policy of you know, a domestic emerging market. We talk 0:11:21.200 --> 0:11:24.840 a lot about the impossible trinity, or the idea that 0:11:24.920 --> 0:11:28.760 you can only have two of three things. I think 0:11:28.840 --> 0:11:33.559 it's a stable exchange rate, an independent monetary policy, and 0:11:33.559 --> 0:11:36.800 an open capital account. So you can't have all three 0:11:36.800 --> 0:11:40.280 of those at once. What are the sort of limiting 0:11:40.600 --> 0:11:45.040 factors on emerging markets when it comes to how they 0:11:45.080 --> 0:11:48.400 control the flow of capital in and out. Yeah, So 0:11:48.440 --> 0:11:51.760 with capital controls, what emerging markets are trying to do 0:11:51.920 --> 0:11:55.520 is to sort of operate in the in the gray 0:11:55.679 --> 0:11:58.800 zone of the impossible trinity. They're kind of trying to, 0:12:00.040 --> 0:12:02.360 you know, in a way, work around it by saying, 0:12:03.200 --> 0:12:07.520 when problems get get severe, we are going to, you know, 0:12:07.600 --> 0:12:12.160 get around it by imposing controls temporarily at least in 0:12:12.280 --> 0:12:17.520 order to manage the inflows of foreign capital. So it 0:12:17.679 --> 0:12:22.600 is indeed a way of getting around the so called 0:12:23.080 --> 0:12:27.040 impossible trinity from theory as you know, from the work 0:12:27.080 --> 0:12:30.120 of Ellen Ray and others, which I suspect you have 0:12:30.720 --> 0:12:34.200 covered in the past, emerging markets actually claim that they 0:12:34.240 --> 0:12:37.920 have an even tougher time because regardless of the exchange 0:12:38.040 --> 0:12:41.600 rate that they choose, they feel that they are sort 0:12:41.640 --> 0:12:46.160 of helpless in the face of foreign capital. So the 0:12:46.280 --> 0:12:49.880 use of capital controls, the use of foreign exchange intervention, 0:12:49.960 --> 0:12:53.800 which I should mention is is another prominent tool that 0:12:53.880 --> 0:12:57.719 emerging markets are using. The use of these tools is 0:12:57.760 --> 0:13:01.240 a way too again as you and you were saying, 0:13:01.280 --> 0:13:05.640 kind of regain some policy space, Um, I mean, as 0:13:05.679 --> 0:13:09.120 you were saying, I mean during the pandemic, we've discovered 0:13:09.160 --> 0:13:11.960 that you know, many e M central banks have been 0:13:12.000 --> 0:13:16.480 able to march into quantitative easing, and that's been a 0:13:16.520 --> 0:13:21.680 way of gaining some policy space. But capital controls and 0:13:21.720 --> 0:13:26.920 foreign exchange intervention are other tools that that these countries 0:13:26.960 --> 0:13:32.960 have been using in order to have some defense when 0:13:33.880 --> 0:13:37.439 there are surges of foreign capital that come into their 0:13:37.480 --> 0:13:43.240 countries driven by you know, changes in market sentiment elsewhere. 0:13:43.280 --> 0:13:46.400 So if you have risk on risk of episodes in 0:13:46.480 --> 0:13:50.720 the advanced economies, these countries are faced by huge surges 0:13:50.760 --> 0:13:55.240 of foreign capital. And to say that, well, you should 0:13:55.280 --> 0:13:58.480 just tighten fiscal policy, or you should just let the 0:13:58.520 --> 0:14:06.480 exchange rate appreciate um and say, well that's it. That's 0:14:06.520 --> 0:14:09.559 what orthodox city tells you, and that's that's the best 0:14:10.400 --> 0:14:15.040 we can do for you. Has frankly proven not acceptable 0:14:15.040 --> 0:14:18.400 to these countries, and they have sort of innovated by 0:14:18.480 --> 0:14:23.520 you know, using capital controls on occasion, by foreign exchange intervention, 0:14:24.120 --> 0:14:28.880 and now after the pandemic, through quantitative easing. So I 0:14:28.880 --> 0:14:33.760 think that what these countries are saying is that, you know, 0:14:33.840 --> 0:14:36.760 we can be unconventional, just as you folks in the 0:14:36.760 --> 0:14:41.480 advanced countries were, Well, I want to get to in 0:14:41.480 --> 0:14:45.320 a minute this sort of beginning of the shift you described, 0:14:45.320 --> 0:14:48.840 maybe starting twenty years ago, some rethinking why but before 0:14:48.880 --> 0:14:53.200 we do that, just for listeners, I feel like when 0:14:53.240 --> 0:14:57.680 I hear foreign capital coming in, that doesn't automatically seem 0:14:57.760 --> 0:14:59.960 like a bad thing or risk. It's like capital, that's 0:15:00.000 --> 0:15:02.640 great money. Cash. You're like, you know, the sort of 0:15:02.640 --> 0:15:06.280 intuitive thing is it's what's it's not immediately intuitive why 0:15:06.320 --> 0:15:08.760 that would ever be a problem. Can you just walk 0:15:08.840 --> 0:15:12.440 through real quickly sort of like what is the sequence 0:15:12.480 --> 0:15:16.680 of events in the classical sort of how these things 0:15:16.720 --> 0:15:20.640 go such that an influx of foreign capital ends up 0:15:20.720 --> 0:15:24.160 creating a crisis or a problem for the recipient country. 0:15:24.960 --> 0:15:28.360 You're absolutely right. I mean, we don't want to leave 0:15:28.400 --> 0:15:32.560 people with the impression that you know, foreign capital is 0:15:32.560 --> 0:15:35.360 is this is this terrible thing. I mean, you and 0:15:35.400 --> 0:15:40.960 I within the US live within free capital markets, within 0:15:41.000 --> 0:15:45.200 our borders, and it would be very difficult for us 0:15:45.200 --> 0:15:48.320 to be convinced that if DC and Maryland and Virginia 0:15:48.400 --> 0:15:50.600 put capital control, so this is going to make our 0:15:50.640 --> 0:15:54.440 lives much better. So so it's true that we don't 0:15:54.440 --> 0:15:57.280 want to create the impression that foreign capital does not 0:15:57.440 --> 0:16:00.720 deliver benefits. It does. But the fact is that the 0:16:00.760 --> 0:16:06.400 global economic system is not at the point where US 0:16:06.440 --> 0:16:10.440 states are within within the United States, so the capacity 0:16:10.480 --> 0:16:14.000 to absorb foreign capital is not the same the way 0:16:14.000 --> 0:16:17.440 it is within the United States. The impact that it 0:16:17.560 --> 0:16:23.000 has on particular sectors within your economy can be quite extreme. 0:16:23.200 --> 0:16:27.280 I think Tracy mentioned the example of housing sectors within 0:16:27.360 --> 0:16:30.160 many of these countries. So you have a flood of 0:16:31.240 --> 0:16:36.560 foreign capital coming and suddenly house prices go up in Singapore, 0:16:36.800 --> 0:16:42.600 in Canada, in Australia, in New Zealand, in in Hong Kong. 0:16:43.080 --> 0:16:46.880 So one of the things that has happened is that 0:16:47.560 --> 0:16:52.520 countries like Canada, in Australia and New Zealand, what we 0:16:52.600 --> 0:16:56.600 think of, as you know, champions of free capital mobility, 0:16:56.680 --> 0:17:00.360 have had to put in place some men years that 0:17:00.440 --> 0:17:04.480 we would call capital controls in order to protect housing 0:17:04.560 --> 0:17:09.119 from being unaffordable in Toronto and Vancouver and Sydney and Melbourne. 0:17:09.720 --> 0:17:13.280 So if you can, if you can imagine that these 0:17:13.359 --> 0:17:16.679 kinds of effects are happening in Canada and Australia, you 0:17:16.720 --> 0:17:20.720 can imagine what's happening in a typical emerging market country. 0:17:21.240 --> 0:17:25.639 When you're getting this huge inflow of foreign capital, you 0:17:25.720 --> 0:17:28.600 have a financial sector that may not be fully developed 0:17:29.119 --> 0:17:32.960 and cannot really perform the function of taking that capital 0:17:33.119 --> 0:17:37.199 and matching it two good users. Often it's going to 0:17:37.320 --> 0:17:41.280 end up boosting prices in the housing sector, and from 0:17:41.280 --> 0:17:44.639 the perspective of the local residents, it's like, is this 0:17:44.760 --> 0:17:47.800 doing me any good? I mean, is it really to 0:17:47.880 --> 0:17:52.119 my benefit that house prices are going up in some 0:17:52.200 --> 0:17:56.080 neighborhoods in my cities? And so I think it's a 0:17:56.160 --> 0:18:00.000 question of absorption capacity. It's a question of how quickly 0:18:00.040 --> 0:18:03.439 the money can flow in and out. Domestic money is 0:18:03.440 --> 0:18:07.600 still going to be with you for a while. Foreign money, 0:18:07.680 --> 0:18:11.080 at the first sign of trouble can easily leave the 0:18:11.119 --> 0:18:14.119 country and cause trouble. So I think I hope that 0:18:14.200 --> 0:18:16.680 gives you a sort of a flavor of why it 0:18:16.920 --> 0:18:20.880 is that we can be fully in favor of foreign capital, 0:18:22.000 --> 0:18:27.879 particularly where countries have a financing gap, but nevertheless, you know, 0:18:28.040 --> 0:18:32.679 question and make sure that it is actually fulfilling the 0:18:32.720 --> 0:18:51.880 function that theory as signs it. So now that we've 0:18:51.920 --> 0:18:55.600 sort of set the scene about how people have been 0:18:55.600 --> 0:19:00.200 thinking about capital controls and why we don't necessarily want 0:19:00.280 --> 0:19:04.400 big influxes of money or outpots of money either, could 0:19:04.440 --> 0:19:07.399 you maybe talk about what what do you think is 0:19:07.520 --> 0:19:12.159 changing now? What's the spark that has set off a 0:19:12.240 --> 0:19:16.119 sort of review of this particular idea At the I 0:19:16.280 --> 0:19:19.399 m F. It's it's been an evolution, so it's I 0:19:19.600 --> 0:19:23.480 wouldn't say that there was you know, like one big 0:19:23.520 --> 0:19:27.600 event that set off this review. I think ever since 0:19:27.680 --> 0:19:32.679 the crisis in Thailand and Indonesia and Korea and you know, 0:19:32.760 --> 0:19:36.760 in major Asian countries, there has been a rethink going on. 0:19:38.320 --> 0:19:42.000 And what happened is that after the global financial crisis, 0:19:43.600 --> 0:19:47.880 many countries started using sort of a heterodox policy tool 0:19:47.960 --> 0:19:52.520 kit to manage surges of inflows as well as setten 0:19:52.600 --> 0:19:57.880 outflows um which led the i m F to say, look, 0:19:57.960 --> 0:20:01.840 I mean, you know, we've been thinking of moving in 0:20:01.880 --> 0:20:06.240 this direction anyway for the last twenty years, and here 0:20:06.280 --> 0:20:10.200 are all these countries after the global financial crisis, affected 0:20:10.200 --> 0:20:14.160 by this crisis, through no fault of their own, trying 0:20:14.200 --> 0:20:18.760 to use, you know, a kind of heterodox policy tool 0:20:18.840 --> 0:20:23.120 kit to manage inflows and outflows. And so in twelve 0:20:23.240 --> 0:20:27.240 the i m F actually sort of officially changed its 0:20:27.560 --> 0:20:31.119 view on the use of capital controls. It said that, 0:20:31.680 --> 0:20:35.399 you know, it recognized that these tools were useful in 0:20:35.440 --> 0:20:39.760 some contexts and that the country should be using them 0:20:41.119 --> 0:20:43.880 when it was in their best interest to do so. 0:20:45.119 --> 0:20:47.120 And at the time this was treated as a big deal. 0:20:47.160 --> 0:20:50.919 I mean, I remember Paul Krugman saying this was a 0:20:50.960 --> 0:20:56.320 sign of the IMF surprising intellectual flexibility. And I know 0:20:56.400 --> 0:20:59.720 that the economists wrote it up at the economists wrote 0:20:59.720 --> 0:21:02.240 it up as the relation. You know, it's like the 0:21:02.480 --> 0:21:07.000 pope had changed the Catholic view on something. So but 0:21:07.040 --> 0:21:09.840 it was really an evolution in the direction of saying, 0:21:09.880 --> 0:21:15.000 we recognize that emerging markets are facing really grave challenges 0:21:15.119 --> 0:21:20.520 from these UH surges and sudden stops, and that in response, 0:21:20.520 --> 0:21:24.960 they're using capital controls, they're using foreign exchange intervention, and 0:21:25.000 --> 0:21:27.880 we recognize that, you know, as long as they don't 0:21:27.920 --> 0:21:32.200 completely rely solely on these tools, as long as they 0:21:32.320 --> 0:21:35.960 use you know, standard tools like monetary and fiscal policy 0:21:36.000 --> 0:21:39.800 and exchange rate flexibility, we will be much more open 0:21:40.560 --> 0:21:45.480 to the use of these other tools in certain circumstances. 0:21:45.480 --> 0:21:50.320 So that's that was the kind of twenty twelve, not 0:21:50.320 --> 0:21:52.520 not in a global sense, but in the i MFS 0:21:52.560 --> 0:21:57.160 inside baseball sense, was a big deal. And it so 0:21:57.400 --> 0:22:01.240 our report. You know, it's like looking at the roughly 0:22:01.280 --> 0:22:04.119 the ten years after the i m F made this 0:22:04.200 --> 0:22:08.399 big change and and seeing how well and of the 0:22:08.440 --> 0:22:11.440 i m F has lived up to what it what 0:22:11.480 --> 0:22:14.440 it wanted to do in twelve. So I think that's 0:22:14.520 --> 0:22:18.600 kind of the evolution. I think clearly the global financial 0:22:18.640 --> 0:22:22.200 crisis was a big factor, and now the pandemic is 0:22:22.240 --> 0:22:27.800 another big story. Shuro' I want to bring you in 0:22:28.640 --> 0:22:30.600 to get some of your thoughts or you know, as 0:22:30.640 --> 0:22:33.840 you sort of look back on this period um or 0:22:33.840 --> 0:22:38.560 there any sort of notable sort of country specific incidents 0:22:38.680 --> 0:22:41.840 either where a sort of new tool kit was unveiled 0:22:41.920 --> 0:22:45.960 or there was a failure to properly respond with policy 0:22:46.040 --> 0:22:50.000 leading to crisis. Like which countries sort of or incidents 0:22:50.000 --> 0:22:54.840 sort of stand out as being particularly um educational or 0:22:54.960 --> 0:22:59.360 useful for analytical purposes. Thanks to Joe for having me 0:23:00.160 --> 0:23:04.320 um in this conversation. I think just adding to percaucious 0:23:04.400 --> 0:23:08.600 points um, some of the case country case studies that 0:23:08.640 --> 0:23:13.560 we worked on in our report across the world provided 0:23:13.680 --> 0:23:18.200 us quite a bit of a perspective on how countries 0:23:18.280 --> 0:23:22.399 deal with the issue of capital flow of capital flows 0:23:22.440 --> 0:23:27.040 in gender. So if you take for example India, India's case, 0:23:27.720 --> 0:23:30.639 I think the two thousand thirteen tape of Trantom episode 0:23:31.920 --> 0:23:36.600 was one of the key points where we find in 0:23:36.680 --> 0:23:42.120 our report that the I m F could have responded 0:23:42.760 --> 0:23:46.960 um uh in a in perhaps a better manner to 0:23:47.200 --> 0:23:51.879 the issue of having pre emptive controls. And if you 0:23:51.920 --> 0:23:56.840 take the countries in the subs African region, which is 0:23:56.880 --> 0:24:00.000 another set of countries that we deal in our case studies, 0:24:00.960 --> 0:24:07.440 you also find similar experiences. But I think broadly speaking 0:24:08.560 --> 0:24:11.919 from the E M world, I think it's essentially the 0:24:11.960 --> 0:24:19.560 balance between having a sequence capital account opening to ensure 0:24:19.640 --> 0:24:24.960 capital comes in, but also ensuring that financial stability risks 0:24:25.400 --> 0:24:30.840 are taken care of to the extent that um in 0:24:30.960 --> 0:24:33.480 some of our findings we see the use of preemptive 0:24:33.480 --> 0:24:37.800 capital controls as a sort of a buffer to maintain 0:24:37.840 --> 0:24:43.720 this balance. It's something that would be useful for policymakers 0:24:43.920 --> 0:24:48.480 too kind of think about. And also, you know, wagh 0:24:48.480 --> 0:24:51.360 in a bit more on that, so that the balance 0:24:51.440 --> 0:24:57.720 between having a sequence capital account opening and having preemptive 0:24:57.720 --> 0:25:02.040 controls would would would pro the balance that's needed, especially 0:25:02.080 --> 0:25:06.040 in the emerging market space. So Joe, if I could 0:25:06.280 --> 0:25:10.400 just come in on that, I think what said sort 0:25:10.440 --> 0:25:13.679 of ties into I think the premise of what you 0:25:13.760 --> 0:25:18.120 were quizzing us on also is that you know, foreign 0:25:18.160 --> 0:25:21.840 capital isn't bad. And as part of this report, you know, 0:25:21.920 --> 0:25:26.040 we spoke to i would say, literally a hundred or 0:25:26.080 --> 0:25:31.359 more very senior policy makers around the world, you know, 0:25:31.400 --> 0:25:36.640 in sort of confidential conversations, and I think the overwhelming 0:25:36.720 --> 0:25:40.040 feeling is that they want to remain open to foreign capital. 0:25:40.720 --> 0:25:46.280 So as Siam was saying, kind of paradoxically, they feel 0:25:46.320 --> 0:25:50.240 that having a little having some flexibility to deal with 0:25:51.680 --> 0:25:56.359 extreme situations of surgeries or sudden stops through capital controls 0:25:57.160 --> 0:26:00.359 will actually give them the ability to keep moving towards 0:26:00.480 --> 0:26:05.000 foreign towards more open capital markets, because what they feel 0:26:05.080 --> 0:26:11.439 is that if they literally open up completely without you know, 0:26:11.960 --> 0:26:15.560 these kind of safeguards and there is a financial crisis, 0:26:16.840 --> 0:26:21.440 that actually sets back for them the cause of globalization. 0:26:22.280 --> 0:26:26.359 Within their domestic constituencies. It becomes difficult for them to 0:26:26.600 --> 0:26:31.200 argue within their own political realm that look, let's open 0:26:31.280 --> 0:26:33.320 up to foreign capital. People say, well, look, we just 0:26:33.400 --> 0:26:35.560 had this massive financial crisis. Why why do you want 0:26:35.640 --> 0:26:39.800 us to open up. So, you know, the senior policymakers 0:26:39.840 --> 0:26:43.880 are very much in favor of open capital markets, but 0:26:44.720 --> 0:26:47.760 quite a number of them are saying, look, give us 0:26:47.760 --> 0:26:51.480 this flexibility, we're not going to abuse it. Uh, it's 0:26:51.520 --> 0:26:54.040 not like we're going to just impose capital controls left, 0:26:54.080 --> 0:26:58.199 right and center. We just needed at specific times, and 0:26:58.280 --> 0:27:00.520 we need, frankly I m F a part at those 0:27:00.560 --> 0:27:04.119 specific times. And that will actually help us in the 0:27:04.200 --> 0:27:07.800 long run to keep moving towards more and more open 0:27:07.840 --> 0:27:12.720 capital markets, because our population will see that it's possible 0:27:12.800 --> 0:27:17.880 to keep opening up financial our capital markets without having 0:27:18.720 --> 0:27:22.400 financial crisis. And I think that was the case of 0:27:23.240 --> 0:27:27.560 many many countries that we saw around the world. Just 0:27:27.600 --> 0:27:30.720 to add to pocacious point, I think, you know, the 0:27:30.800 --> 0:27:34.600 IMF also has to be credited in the sense especially 0:27:34.600 --> 0:27:39.120 in countries, say such as substance in substern Africa, where 0:27:39.160 --> 0:27:44.760 it was previously criticized for promoting or or advocating for 0:27:44.960 --> 0:27:49.640