Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe Wisnal and I'm Tracy Halloway. So, Tracy, evolution
Speaker 1: of economic thought is a big topic for us, especially
Speaker 1: this year. UM, a lot of a lot of discussion
Speaker 1: and about monetary policy, fiscal policy. Uh, one of our
Speaker 1: recurring themes, no doubt. Yeah, I mean it feels like
Speaker 1: a lot of these conversations had begun even before, but
Speaker 1: this year is kind of the one that makes everyone
Speaker 1: start taking them or at least talking about them seriously.
Speaker 1: So things like modern monetary theory, once considered very very heterodox,
Speaker 1: are now I mean now you see certain US politicians
Speaker 1: talking about it. Uh, the idea of a greater role
Speaker 1: for fiscal policy alongside money policy. There are a lot
Speaker 1: of standard thoughts that are being overturned or at the
Speaker 1: beginning of being overturned maybe right some some stage of evolution.
Speaker 1: We haven't really I mean, we've done a little bit,
Speaker 1: but we haven't really taken this sort of theme of
Speaker 1: evolution however, within the context of say emerging markets, or
Speaker 1: we haven't really done as much on it. We've done
Speaker 1: a little actually, but not that much yet. Yeah. So
Speaker 1: emerging markets this year, we're pretty interesting clearly under a
Speaker 1: lot of stress because these are the countries that are
Speaker 1: dealing with a huge case load of the virus, the coronavirus,
Speaker 1: and also dealing with the economic fallout um of everything
Speaker 1: that's going on in the rest of the world. So
Speaker 1: it feels like they're sort of getting this double whammy
Speaker 1: of maybe not having as great health systems as a
Speaker 1: lot of the developed world, but still having to deal
Speaker 1: with the economic impacts. So, you know, back in March,
Speaker 1: remember like e M looked like it was very much
Speaker 1: in trouble. Yeah, you know, I really do think and
Speaker 1: it's not exactly what we're gonna be talking about today,
Speaker 1: but I do think one of the themes from that's
Speaker 1: going to be interesting in retrospect and with pretty important implications,
Speaker 1: is whether various EMS have more policy flexibility that previously appreciated.
Speaker 1: Whether it's their ability to do quantitative easing, whether it's
Speaker 1: their ability to run fiscal deficits. It's possible that after
Speaker 1: UM people might start to think that some e M
Speaker 1: s might have more more space to engage in countercyclical
Speaker 1: policy than previously appreciate. It. Oh, absolutely, and we're already
Speaker 1: sort of seeing that because Indonesia, I mean, who would
Speaker 1: have thought a few years ago the Indonesia would be
Speaker 1: the first central bank to do direct financing UH and
Speaker 1: in that's entirely possible. So we are seeing some of
Speaker 1: the Yeah, so we are seeing some emerging markets experimenting
Speaker 1: with new types of policy. An are a big question,
Speaker 1: of course, and this is something that Yeah, it is
Speaker 1: a constant theme in discussions relate relate to UH control
Speaker 1: of the capital account, limiting hot money or money coming
Speaker 1: in coming out UM. The degree to which h e
Speaker 1: M s should keep a tight leash on capital inflows
Speaker 1: and outflows is something that always gets debated, and there's
Speaker 1: always sort of a rethinking about what is the appropriate
Speaker 1: degree to which such things should be tightly controlled. Yeah,
Speaker 1: and I think I mean, for years and years and years,
Speaker 1: it was pretty clear that the international political system, I
Speaker 1: guess had a bias against capital controls. You know, they
Speaker 1: wanted liberalization of the current account, they wanted money to
Speaker 1: flow freely between countries, and we've seen at various points
Speaker 1: in time that that's not always in the best intro
Speaker 1: of the country itself. So you know, for instance, if
Speaker 1: you're an emerging market somewhere, and suddenly you've got this
Speaker 1: influx of hot money from abroad because people are looking
Speaker 1: for yield and they pour it all into your housing
Speaker 1: market or something like that that might not actually be
Speaker 1: what you want at that particular moment in time, an
Speaker 1: overheated housing market. So that's been an ongoing debate, and
Speaker 1: I think you're right, we're starting to see some discussion
Speaker 1: of it again. Provides another sort of catalyst to look
Speaker 1: into this topic. Exactly right. Well, we have two very
Speaker 1: great guests. I'm excited to chat with him about this topic.
Speaker 1: We're going to be speaking with a percosh Lengani. He's
Speaker 1: assistant director and senior personnel manager in the i m
Speaker 1: f S Independent Evaluation Office. Well Is trurom Balis Supermania
Speaker 1: and a senior research officer at the i e O
Speaker 1: and I m F excited about talking to both of
Speaker 1: them on this topic. They both recently done work on this. Uh. Prakash,
Speaker 1: thank you very much for joining us. Thanks show, It's
Speaker 1: it's great to be on this show over with you
Speaker 1: and Tracy have. I've really enjoyed listening to your podcast. Oh,
Speaker 1: thank you and sure wrong thank you as well. Hi. Guys,
Speaker 1: how are you doing? Good to be on this podcast.
Speaker 1: Very kind of both of you to say, well, let's
Speaker 1: get started, percush if you want to kick us off.
Speaker 1: You know, we talked about evolution of thought. But for
Speaker 1: those unfamiliar, I include myself in the category just to
Speaker 1: be clear. But for those unfamiliar, what has been the
Speaker 1: sort of orthodox standard I am F view on how
Speaker 1: to think about capital control? Okay, well, I don't want
Speaker 1: to take you too far back into history, but but
Speaker 1: you know, a pre orthodox view, actually around the time
Speaker 1: that the IMF was created, one espoused by Keynes and
Speaker 1: Harry dextra White at the U. S. Treasury, was that
Speaker 1: you could have free trade, but you needed to actually
Speaker 1: have capital controls. So when the I m F was founded,
Speaker 1: the prevailing viewers that you actually needed capital controls, that
Speaker 1: you really couldn't have the instability that the free movement
Speaker 1: of foreign capital might bring about. But then you had
Speaker 1: the Berlin volved falling and capitalism was the only game
Speaker 1: in town, and everyone thought, look, what this is telling
Speaker 1: us is that you know, capitalism rules, and we should
Speaker 1: just have freedom of mobility, not just of trade the
Speaker 1: way we've been having, but of the mobility of capital.
Speaker 1: And so you know, in the early nineties, the U. S.
Speaker 1: Treasury and the i m F, I think, for understandable reasons,
Speaker 1: given the big events that had just happened, took the
Speaker 1: view that, you know, that emerging markets and others should
Speaker 1: be opening up to foreign capital and that they should
Speaker 1: be having open capital mark it's and so this was
Speaker 1: kind of the view as Tracy was describing, sort of
Speaker 1: as of as of twenty years ago, which is around
Speaker 1: the time that I I moved from the from the
Speaker 1: FED to the I m F. So that's that's that's
Speaker 1: where things were. I mean that definitely as as Tracy
Speaker 1: was saying, sort of a bias that said, you know,
Speaker 1: capital should be free to move across countries. You really
Speaker 1: should not have capital controls. So I'm curious twenty years
Speaker 1: ago was there much discussion of the pros and cons
Speaker 1: of capital controls or to what degree was it considered
Speaker 1: economic orthodoxy that you wanted free flow of money across borders.
Speaker 1: I think there were always some skeptics of the view
Speaker 1: that allowing capital to flow freely across national boundaries would
Speaker 1: always bring about the benefits to the recipient countries. But
Speaker 1: I would say that, you know, sort of after the
Speaker 1: fall of the Berlin Wall, there was a there was
Speaker 1: a sense of euphoria that we needed to be open
Speaker 1: to all forms of capitalism, including sort of financial capitalism
Speaker 1: and financial globalization. So there were people like you know,
Speaker 1: Joe Stiglitz and Danny Roderick who were a bit more skeptical,
Speaker 1: or I would say quite a bit skeptical that that
Speaker 1: foreign capital would deliver benefits. But I think that most
Speaker 1: of us, I think it's sort of drunk the kool
Speaker 1: aid and and we're very much in favor of of
Speaker 1: of having sort of open capital markets. I mean, I
Speaker 1: certainly was in that camp twenty years ago. So this
Speaker 1: might be another sort of remedial question. But I understand
Speaker 1: an extremely high abstract level what open capital accounts mean
Speaker 1: and free flow of capital, But what does that actually
Speaker 1: mean capital controls? So if you say a country has
Speaker 1: implemented capital controls or maybe a country ought to consider them,
Speaker 1: what are we typically talking about in practice in terms
Speaker 1: of creating an impediment to that free flow? Yes, so
Speaker 1: I think we're talking about things that would discriminate against
Speaker 1: foreigners versus domestic residents. We're talking about things that would say,
Speaker 1: if you want to bring in capital for a long
Speaker 1: period of time two or three years, we will give
Speaker 1: you the following tax treatment. But if you want to
Speaker 1: bring in capital just for a short amount of time,
Speaker 1: you have to pay a higher tax. So you know,
Speaker 1: the question is I think most people recognize that there
Speaker 1: is sort of a pecking orders, as you and Tracy
Speaker 1: were kind of discussing already. I'm among the kinds of
Speaker 1: flows of capital that you know. There are some like
Speaker 1: foreign direct investment, where I think the benefits are much
Speaker 1: more easy to demonstrate, and there is the hot money
Speaker 1: that you guys were talking about, where it's not very
Speaker 1: clear what the benefits are. And you know, no less
Speaker 1: a person than stan Fisher. I remember hearing about what
Speaker 1: he said at Jackson All conference where he said Israel's governor,
Speaker 1: he said, I don't know what possible benefits that can
Speaker 1: be for us from short term capital flows. And you know,
Speaker 1: this is Stan Fisher, this is not, you know, just
Speaker 1: just some French French person. So I think, yeah, exactly,
Speaker 1: I think that that the impediments we're talking about are
Speaker 1: sort of discriminatory taxes to discourage foreign capital when it
Speaker 1: is viewed that it is not serving the functions described
Speaker 1: that that was subscribed, or trying to put impediments that
Speaker 1: would try to force the foreign capital into longer duration
Speaker 1: investments rather than hot money. Can you talk a little
Speaker 1: bit about what impact capital controls can have on monetary
Speaker 1: policy of you know, a domestic emerging market. We talk
Speaker 1: a lot about the impossible trinity, or the idea that
Speaker 1: you can only have two of three things. I think
Speaker 1: it's a stable exchange rate, an independent monetary policy, and
Speaker 1: an open capital account. So you can't have all three
Speaker 1: of those at once. What are the sort of limiting
Speaker 1: factors on emerging markets when it comes to how they
Speaker 1: control the flow of capital in and out. Yeah, So
Speaker 1: with capital controls, what emerging markets are trying to do
Speaker 1: is to sort of operate in the in the gray
Speaker 1: zone of the impossible trinity. They're kind of trying to,
Speaker 1: you know, in a way, work around it by saying,
Speaker 1: when problems get get severe, we are going to, you know,
Speaker 1: get around it by imposing controls temporarily at least in
Speaker 1: order to manage the inflows of foreign capital. So it
Speaker 1: is indeed a way of getting around the so called
Speaker 1: impossible trinity from theory as you know, from the work
Speaker 1: of Ellen Ray and others, which I suspect you have
Speaker 1: covered in the past, emerging markets actually claim that they
Speaker 1: have an even tougher time because regardless of the exchange
Speaker 1: rate that they choose, they feel that they are sort
Speaker 1: of helpless in the face of foreign capital. So the
Speaker 1: use of capital controls, the use of foreign exchange intervention,
Speaker 1: which I should mention is is another prominent tool that
Speaker 1: emerging markets are using. The use of these tools is
Speaker 1: a way too again as you and you were saying,
Speaker 1: kind of regain some policy space, Um, I mean, as
Speaker 1: you were saying, I mean during the pandemic, we've discovered
Speaker 1: that you know, many e M central banks have been
Speaker 1: able to march into quantitative easing, and that's been a
Speaker 1: way of gaining some policy space. But capital controls and
Speaker 1: foreign exchange intervention are other tools that that these countries
Speaker 1: have been using in order to have some defense when
Speaker 1: there are surges of foreign capital that come into their
Speaker 1: countries driven by you know, changes in market sentiment elsewhere.
Speaker 1: So if you have risk on risk of episodes in
Speaker 1: the advanced economies, these countries are faced by huge surges
Speaker 1: of foreign capital. And to say that, well, you should
Speaker 1: just tighten fiscal policy, or you should just let the
Speaker 1: exchange rate appreciate um and say, well that's it. That's
Speaker 1: what orthodox city tells you, and that's that's the best
Speaker 1: we can do for you. Has frankly proven not acceptable
Speaker 1: to these countries, and they have sort of innovated by
Speaker 1: you know, using capital controls on occasion, by foreign exchange intervention,
Speaker 1: and now after the pandemic, through quantitative easing. So I
Speaker 1: think that what these countries are saying is that, you know,
Speaker 1: we can be unconventional, just as you folks in the
Speaker 1: advanced countries were, Well, I want to get to in
Speaker 1: a minute this sort of beginning of the shift you described,
Speaker 1: maybe starting twenty years ago, some rethinking why but before
Speaker 1: we do that, just for listeners, I feel like when
Speaker 1: I hear foreign capital coming in, that doesn't automatically seem
Speaker 1: like a bad thing or risk. It's like capital, that's
Speaker 1: great money. Cash. You're like, you know, the sort of
Speaker 1: intuitive thing is it's what's it's not immediately intuitive why
Speaker 1: that would ever be a problem. Can you just walk
Speaker 1: through real quickly sort of like what is the sequence
Speaker 1: of events in the classical sort of how these things
Speaker 1: go such that an influx of foreign capital ends up
Speaker 1: creating a crisis or a problem for the recipient country.
Speaker 1: You're absolutely right. I mean, we don't want to leave
Speaker 1: people with the impression that you know, foreign capital is
Speaker 1: is this is this terrible thing. I mean, you and
Speaker 1: I within the US live within free capital markets, within
Speaker 1: our borders, and it would be very difficult for us
Speaker 1: to be convinced that if DC and Maryland and Virginia
Speaker 1: put capital control, so this is going to make our
Speaker 1: lives much better. So so it's true that we don't
Speaker 1: want to create the impression that foreign capital does not
Speaker 1: deliver benefits. It does. But the fact is that the
Speaker 1: global economic system is not at the point where US
Speaker 1: states are within within the United States, so the capacity
Speaker 1: to absorb foreign capital is not the same the way
Speaker 1: it is within the United States. The impact that it
Speaker 1: has on particular sectors within your economy can be quite extreme.
Speaker 1: I think Tracy mentioned the example of housing sectors within
Speaker 1: many of these countries. So you have a flood of
Speaker 1: foreign capital coming and suddenly house prices go up in Singapore,
Speaker 1: in Canada, in Australia, in New Zealand, in in Hong Kong.
Speaker 1: So one of the things that has happened is that
Speaker 1: countries like Canada, in Australia and New Zealand, what we
Speaker 1: think of, as you know, champions of free capital mobility,
Speaker 1: have had to put in place some men years that
Speaker 1: we would call capital controls in order to protect housing
Speaker 1: from being unaffordable in Toronto and Vancouver and Sydney and Melbourne.
Speaker 1: So if you can, if you can imagine that these
Speaker 1: kinds of effects are happening in Canada and Australia, you
Speaker 1: can imagine what's happening in a typical emerging market country.
Speaker 1: When you're getting this huge inflow of foreign capital, you
Speaker 1: have a financial sector that may not be fully developed
Speaker 1: and cannot really perform the function of taking that capital
Speaker 1: and matching it two good users. Often it's going to
Speaker 1: end up boosting prices in the housing sector, and from
Speaker 1: the perspective of the local residents, it's like, is this
Speaker 1: doing me any good? I mean, is it really to
Speaker 1: my benefit that house prices are going up in some
Speaker 1: neighborhoods in my cities? And so I think it's a
Speaker 1: question of absorption capacity. It's a question of how quickly
Speaker 1: the money can flow in and out. Domestic money is
Speaker 1: still going to be with you for a while. Foreign money,
Speaker 1: at the first sign of trouble can easily leave the
Speaker 1: country and cause trouble. So I think I hope that
Speaker 1: gives you a sort of a flavor of why it
Speaker 1: is that we can be fully in favor of foreign capital,
Speaker 1: particularly where countries have a financing gap, but nevertheless, you know,
Speaker 1: question and make sure that it is actually fulfilling the
Speaker 1: function that theory as signs it. So now that we've
Speaker 1: sort of set the scene about how people have been
Speaker 1: thinking about capital controls and why we don't necessarily want
Speaker 1: big influxes of money or outpots of money either, could
Speaker 1: you maybe talk about what what do you think is
Speaker 1: changing now? What's the spark that has set off a
Speaker 1: sort of review of this particular idea At the I
Speaker 1: m F. It's it's been an evolution, so it's I
Speaker 1: wouldn't say that there was you know, like one big
Speaker 1: event that set off this review. I think ever since
Speaker 1: the crisis in Thailand and Indonesia and Korea and you know,
Speaker 1: in major Asian countries, there has been a rethink going on.
Speaker 1: And what happened is that after the global financial crisis,
Speaker 1: many countries started using sort of a heterodox policy tool
Speaker 1: kit to manage surges of inflows as well as setten
Speaker 1: outflows um which led the i m F to say, look,
Speaker 1: I mean, you know, we've been thinking of moving in
Speaker 1: this direction anyway for the last twenty years, and here
Speaker 1: are all these countries after the global financial crisis, affected
Speaker 1: by this crisis, through no fault of their own, trying
Speaker 1: to use, you know, a kind of heterodox policy tool
Speaker 1: kit to manage inflows and outflows. And so in twelve
Speaker 1: the i m F actually sort of officially changed its
Speaker 1: view on the use of capital controls. It said that,
Speaker 1: you know, it recognized that these tools were useful in
Speaker 1: some contexts and that the country should be using them
Speaker 1: when it was in their best interest to do so.
Speaker 1: And at the time this was treated as a big deal.
Speaker 1: I mean, I remember Paul Krugman saying this was a
Speaker 1: sign of the IMF surprising intellectual flexibility. And I know
Speaker 1: that the economists wrote it up at the economists wrote
Speaker 1: it up as the relation. You know, it's like the
Speaker 1: pope had changed the Catholic view on something. So but
Speaker 1: it was really an evolution in the direction of saying,
Speaker 1: we recognize that emerging markets are facing really grave challenges
Speaker 1: from these UH surges and sudden stops, and that in response,
Speaker 1: they're using capital controls, they're using foreign exchange intervention, and
Speaker 1: we recognize that, you know, as long as they don't
Speaker 1: completely rely solely on these tools, as long as they
Speaker 1: use you know, standard tools like monetary and fiscal policy
Speaker 1: and exchange rate flexibility, we will be much more open
Speaker 1: to the use of these other tools in certain circumstances.
Speaker 1: So that's that was the kind of twenty twelve, not
Speaker 1: not in a global sense, but in the i MFS
Speaker 1: inside baseball sense, was a big deal. And it so
Speaker 1: our report. You know, it's like looking at the roughly
Speaker 1: the ten years after the i m F made this
Speaker 1: big change and and seeing how well and of the
Speaker 1: i m F has lived up to what it what
Speaker 1: it wanted to do in twelve. So I think that's
Speaker 1: kind of the evolution. I think clearly the global financial
Speaker 1: crisis was a big factor, and now the pandemic is
Speaker 1: another big story. Shuro' I want to bring you in
Speaker 1: to get some of your thoughts or you know, as
Speaker 1: you sort of look back on this period um or
Speaker 1: there any sort of notable sort of country specific incidents
Speaker 1: either where a sort of new tool kit was unveiled
Speaker 1: or there was a failure to properly respond with policy
Speaker 1: leading to crisis. Like which countries sort of or incidents
Speaker 1: sort of stand out as being particularly um educational or
Speaker 1: useful for analytical purposes. Thanks to Joe for having me
Speaker 1: um in this conversation. I think just adding to percaucious
Speaker 1: points um, some of the case country case studies that
Speaker 1: we worked on in our report across the world provided
Speaker 1: us quite a bit of a perspective on how countries
Speaker 1: deal with the issue of capital flow of capital flows
Speaker 1: in gender. So if you take for example India, India's case,
Speaker 1: I think the two thousand thirteen tape of Trantom episode
Speaker 1: was one of the key points where we find in
Speaker 1: our report that the I m F could have responded
Speaker 1: um uh in a in perhaps a better manner to
Speaker 1: the issue of having pre emptive controls. And if you
Speaker 1: take the countries in the subs African region, which is
Speaker 1: another set of countries that we deal in our case studies,
Speaker 1: you also find similar experiences. But I think broadly speaking
Speaker 1: from the E M world, I think it's essentially the
Speaker 1: balance between having a sequence capital account opening to ensure
Speaker 1: capital comes in, but also ensuring that financial stability risks
Speaker 1: are taken care of to the extent that um in
Speaker 1: some of our findings we see the use of preemptive
Speaker 1: capital controls as a sort of a buffer to maintain
Speaker 1: this balance. It's something that would be useful for policymakers
Speaker 1: too kind of think about. And also, you know, wagh
Speaker 1: in a bit more on that, so that the balance
Speaker 1: between having a sequence capital account opening and having preemptive
Speaker 1: controls would would would pro the balance that's needed, especially
Speaker 1: in the emerging market space. So Joe, if I could
Speaker 1: just come in on that, I think what said sort
Speaker 1: of ties into I think the premise of what you
Speaker 1: were quizzing us on also is that you know, foreign
Speaker 1: capital isn't bad. And as part of this report, you know,
Speaker 1: we spoke to i would say, literally a hundred or
Speaker 1: more very senior policy makers around the world, you know,
Speaker 1: in sort of confidential conversations, and I think the overwhelming
Speaker 1: feeling is that they want to remain open to foreign capital.
Speaker 1: So as Siam was saying, kind of paradoxically, they feel
Speaker 1: that having a little having some flexibility to deal with
Speaker 1: extreme situations of surgeries or sudden stops through capital controls
Speaker 1: will actually give them the ability to keep moving towards
Speaker 1: foreign towards more open capital markets, because what they feel
Speaker 1: is that if they literally open up completely without you know,
Speaker 1: these kind of safeguards and there is a financial crisis,
Speaker 1: that actually sets back for them the cause of globalization.
Speaker 1: Within their domestic constituencies. It becomes difficult for them to
Speaker 1: argue within their own political realm that look, let's open
Speaker 1: up to foreign capital. People say, well, look, we just
Speaker 1: had this massive financial crisis. Why why do you want
Speaker 1: us to open up. So, you know, the senior policymakers
Speaker 1: are very much in favor of open capital markets, but
Speaker 1: quite a number of them are saying, look, give us
Speaker 1: this flexibility, we're not going to abuse it. Uh, it's
Speaker 1: not like we're going to just impose capital controls left,
Speaker 1: right and center. We just needed at specific times, and
Speaker 1: we need, frankly I m F a part at those
Speaker 1: specific times. And that will actually help us in the
Speaker 1: long run to keep moving towards more and more open
Speaker 1: capital markets, because our population will see that it's possible
Speaker 1: to keep opening up financial our capital markets without having
Speaker 1: financial crisis. And I think that was the case of
Speaker 1: many many countries that we saw around the world. Just
Speaker 1: to add to pocacious point, I think, you know, the
Speaker 1: IMF also has to be credited in the sense especially
Speaker 1: in countries, say such as substance in substern Africa, where
Speaker 1: it was previously criticized for promoting or or advocating for
Speaker 1: a open capital account, and in recent years the FF
Speaker 1: has been fairly measured in these countries in terms of
Speaker 1: UM advocating for open more open capital markets. To extent
Speaker 1: that you know, one of the findings that we have
Speaker 1: is that we would probably we probably feel that the
Speaker 1: IMF has a little bit more to allow or two
Speaker 1: encourage countries to open up the markets in that region.
Speaker 1: So the the i m F has made a lot
Speaker 1: of effort in recent years to balance its policies, which
Speaker 1: we also highlight in the report. Well, for your report,
Speaker 1: I think you spoke to quite a few people within
Speaker 1: the I m F UM and I guess outside as
Speaker 1: well to get their views. What was the sort of
Speaker 1: general thinking, UM when you came to talk to them, Like,
Speaker 1: what were some of the views that you heard that
Speaker 1: that you remember and that strike you as interesting? I think, yeah,
Speaker 1: we did indeed speak to everyone within the IMF. I think,
Speaker 1: just to make it clear to your listeners, the Independent
Speaker 1: Evaluation Office is sort of part of the IMF, but
Speaker 1: as in name indicates, it's also it stays at arms
Speaker 1: length from the I m F. It. You know, the
Speaker 1: topics we choose to investigate are decided by the office itself.
Speaker 1: We are at arms length from IMF management and it's board,
Speaker 1: so you know, we have considerable freedom to pick the
Speaker 1: topics and in depth report on them through candid conversations
Speaker 1: with IMF staff as well as outside. So I think
Speaker 1: within the IMF, people felt that they had been in
Speaker 1: a sense, you know, sort of given their marching orders
Speaker 1: in twelve and namely that they should be more open
Speaker 1: to the use of capital controls and they should be
Speaker 1: more cautious about just pushing for capital account liberalization. So
Speaker 1: I think most people said they knew those were the
Speaker 1: those were the orders, and they followed them, and we
Speaker 1: found that they allowed them quite well, almost to the
Speaker 1: extent as Shiram was saying, that there was almost a
Speaker 1: sense that they were not willing to take any risks
Speaker 1: in advocating that countries go for increased openness to foreign
Speaker 1: capital So you know, in China and India, some policymakers
Speaker 1: told us that they were poised at different times where
Speaker 1: they could have made a push for more open capital markets,
Speaker 1: you know, given the political setting and the other constraints,
Speaker 1: but the i m F was cautious and following following
Speaker 1: the orders twenty twelve orders outside d i m F
Speaker 1: and we spoke to senior policymakers, they also, as Sam said,
Speaker 1: gave the IMF considerable credit for, you know, for in
Speaker 1: a sense fixing what the criticisms had been twenty years
Speaker 1: ago after the ancient crisis. So in that sense of
Speaker 1: reframing of the i m F position was considered as
Speaker 1: moving it, as having moved it to a good place.
Speaker 1: But I think there is a feeling now that you know,
Speaker 1: even in the short space of less than ten years,
Speaker 1: things have evolved and that countries need quite a bit
Speaker 1: more policy space to deal with the challenges that they
Speaker 1: are facing. In our report, at least, we take these
Speaker 1: views seriously and advocate that that on the one hand,
Speaker 1: you know, the IMF should not back away completely from
Speaker 1: the view that capital open capital markets are good. It
Speaker 1: should actually be perhaps even a little more aggressive on
Speaker 1: advocating capital open capital markets as a long run goal,
Speaker 1: but at the same time it should be even a
Speaker 1: little more open to the use of controls when they
Speaker 1: are needed. Um. I mean, one example is is Iceland
Speaker 1: in twenty six you know, Iceland, as you know, had
Speaker 1: just gone through an enormous crisis in two thousand two nine.
Speaker 1: In sixteen, they wanted to impose some capital controls because
Speaker 1: there was a surge of foreign capital. The I m
Speaker 1: F said, well, yes, you folks are experiencing a surge,
Speaker 1: but look, it's not as big as what you had
Speaker 1: during the global financial crisis, and so look, you really
Speaker 1: perhaps should not be imposing these controls. And the Icelandic
Speaker 1: authority said, that's precisely the point. We don't want to
Speaker 1: wait till what happened last time again happens. You know,
Speaker 1: this time we agree with you. The surge is not
Speaker 1: as big, but you know, frankly, we'd rather impose the
Speaker 1: controls now preemptively so that it doesn't get to the
Speaker 1: repeat of the previous crisis. So that's the sense in
Speaker 1: which you know, the I MF needs to be still
Speaker 1: a little more open to the use of these sort
Speaker 1: of preemptive capital controls, recognizing that policymakers are have bought
Speaker 1: into the idea of open capital markets over the long run,
Speaker 1: and that they're not going to use capital controls indiscriminately.
Speaker 1: That's something else that our report found. When we did
Speaker 1: a very thorough survey of actual use of capital controls,
Speaker 1: we found that they were not that frequent. It's just
Speaker 1: that when they are needed, countries want to use them.
Speaker 1: So let's talk about that what you just said, when
Speaker 1: they're needed, because I mean, I think I heard one
Speaker 1: time the people said, oh, the first rule of capital controls.
Speaker 1: You don't talk about capital controls because if you hint
Speaker 1: at the idea that you're going to lock money in
Speaker 1: or out of the country, then suddenly everyone tries to
Speaker 1: raise against it. So you can't just like sort of
Speaker 1: wait till the crisis hits. And as you mentioned in
Speaker 1: the beginning of the chat, you know, it's sort of
Speaker 1: like some countries, even developed ones, have sort of very
Speaker 1: light versions of capital controls. You mentioned us Alia in
Speaker 1: Canada taking some or New Zealand taking some efforts to
Speaker 1: curve their housing markets. So what are the parameters or
Speaker 1: guide posts you look at or that one looks at.
Speaker 1: So that a country or the I m F can
Speaker 1: evaluate when capital controls are appropriate, so that these decisions
Speaker 1: are not being made once the crisis has already started,
Speaker 1: and even the mere chatter of capital controls would only
Speaker 1: make things work. Yeah, So I mean there are a
Speaker 1: number of principles one can use. First, I think, as
Speaker 1: your question suggested, um, you know, controls on outflows are
Speaker 1: always going to be more difficult than controls on inflows.
Speaker 1: So I mean you have to be thinking of this
Speaker 1: dynamic game and and and and saying, well, if I
Speaker 1: don't want to be in trouble during the outflows, what
Speaker 1: do I have to do now? So the question is
Speaker 1: when the third you're starting, that's when you have to
Speaker 1: think about what is it that I'm going to tell
Speaker 1: foreign investors and what is it that I'm going to
Speaker 1: be frank and clear with them about. So that's the
Speaker 1: stage when you can tell them, look, folks, we welcome
Speaker 1: your your capital. We need it. It's going to help us,
Speaker 1: but it's not going to help us if you leave
Speaker 1: at the first sign of trouble or or anything else.
Speaker 1: So when it's coming in is when you can impose
Speaker 1: some conditions on the money coming in. So that's that.
Speaker 1: That's what I was talking about, Like, that's the stage
Speaker 1: where you could tell people, look, if you bring in
Speaker 1: money for three months, here's the tax. If you're bring
Speaker 1: in money for two years, here's the lower tax. So
Speaker 1: if you're clear with them at the outset about what
Speaker 1: the conditions are that that would apply to them, that
Speaker 1: is something that you can do. And then at that
Speaker 1: stage people will have less of a chance to complain
Speaker 1: and say, oh, you're imposing capital controls. You said, no, look,
Speaker 1: we told you this was the tax differential tax rate
Speaker 1: that was going to prevail based on maturity, and we
Speaker 1: are just imposing the rules. So you know, as part
Speaker 1: of this report, we actually talked to rating agencies and
Speaker 1: and other folks in global financial markets and they said
Speaker 1: that obviously what investors hate is uncertainty about what the
Speaker 1: rules are going to be. So if if a country
Speaker 1: is sort of upfront about what the regime is going
Speaker 1: to be under which people can move money in and out,
Speaker 1: investors can live with even a somewhat more restrictive regime
Speaker 1: that says, look, I'm sorry, but the tax rate on
Speaker 1: moving money in and out over short durations is going
Speaker 1: to be much higher than if you bring in my
Speaker 1: over long durations. So I think that's something that's very
Speaker 1: important for e M s to keep in mind. They
Speaker 1: do need the foreign capital, but they should have a
Speaker 1: fair bit of transparency in the regime, uh and not
Speaker 1: really subject that regime to you know, frequent and arbitrary changes.
Speaker 1: I think that's what foreign investors say. It is the uncertainty.
Speaker 1: I mean that said, there can be always severe stresses
Speaker 1: where during outflaw situations, countries may need to do what
Speaker 1: they what they need to do. And I think to
Speaker 1: the extent you can predict the course of events, you
Speaker 1: should be transparent and clear with foreign investors about the regime.
Speaker 1: But as we found, for instance, in the situation that
Speaker 1: Shiram was describing, you know, India had no idea that
Speaker 1: the taper tantrum would have such a massive impact on
Speaker 1: its capital outflows. There's no way that India could have
Speaker 1: credibly told people ahead of time, look, we're not going
Speaker 1: to touch you. It was such a severe crisis. You
Speaker 1: have the rupie depreciation depreciating like crazy in a three
Speaker 1: month period. I think there are always situations like that
Speaker 1: where countries have to do what's in their best interests.
Speaker 1: And often that's when they're looking for support from the
Speaker 1: I m F to say, look this this is this
Speaker 1: is a severe situation. The country will be using some
Speaker 1: capital controls, and I think we think that this is
Speaker 1: a good situation for it. You know China, you know,
Speaker 1: severe stresses use capital controls. And again would have looked
Speaker 1: who was looking for strong IMF support. Just to add
Speaker 1: to that joke, I think there's also reflects on a
Speaker 1: bigger point of both institutional capacity and arbitredness. With this
Speaker 1: controls and themselves they work are just trying to say,
Speaker 1: is that we would our investors are more than happy
Speaker 1: to have a consistent set of policies which they are
Speaker 1: you know, attuned to. So the challenge for e m
Speaker 1: s is to have a set of policies which is consistent,
Speaker 1: not arbitrary, but yet providing the necessary confidence to the market.
Speaker 1: So I think from an emerging market's point of view
Speaker 1: dealing with this crisis is that's basically the you know,
Speaker 1: besides the balance, the key is to get consistency in
Speaker 1: their policy making. I have a slightly weird question, but
Speaker 1: to to what extent should we be viewed doing this
Speaker 1: new attitude towards capital controls as a sort of reflection
Speaker 1: of I guess, a growing recognition that there are certain
Speaker 1: parts of globalization that might not be desired. So we've
Speaker 1: seen this in various avenues of life, but I mean
Speaker 1: trade restrictions would be the obvious one. We've seen a
Speaker 1: number of countries institute trade barriers of one or another
Speaker 1: to protect their domestic economies. Is embracing capital controls basically
Speaker 1: another way of controlling the globalized economy and trying to
Speaker 1: make it work for you better. That's that's not a
Speaker 1: weird angle at all to me. That that is, you've
Speaker 1: gotten to the essence of it, I think, which is, yes,
Speaker 1: you know, globalization is wonderful. It works for the average person,
Speaker 1: It works for most of us most of the time.
Speaker 1: But clearly there are segments of the population too which
Speaker 1: are not seeing the benefits or are not convinced of
Speaker 1: the benefits. So that's exactly right. I mean, I think,
Speaker 1: as you said, we're seeing this with trade, which I
Speaker 1: feel is you know, really quite beneficial to the large
Speaker 1: majority of people in most countries. But I think we're
Speaker 1: seeing this particularly with financial globalization. I think people are
Speaker 1: simply not seeing the benefits that the widespread benefits across
Speaker 1: their societies of unfettered flow of foreign capital. And I
Speaker 1: think I think paradoxically trade is getting blamed for some
Speaker 1: of the sense of financial globalization. I mean, I think
Speaker 1: these are siblings, but the wrong sibling is is drawing
Speaker 1: the blame. I think, you know, people like Danny Roderick
Speaker 1: have talked about this and called it sort of hyper globalization,
Speaker 1: namely that we've taken a good thing and pushed it
Speaker 1: to a point where, uh, it's the benefits are not evident,
Speaker 1: some people are losing out, and we are seeing a backlash.
Speaker 1: And I think this goes a little bit to what
Speaker 1: I was saying, that it actually allowing some flexibility in
Speaker 1: having countries stepped back a little bit from globalization is
Speaker 1: paradoxically the way that we will keep moving ahead on it,
Speaker 1: because otherwise the backlash will will actually keep us from advancing.
Speaker 1: And and as as Tracy said, we're seeing it in trade. Um,
Speaker 1: we did see a bit against financial globalization also, you know,
Speaker 1: with the kind of the Occupy Wall Street movement and
Speaker 1: the one per centers and all that. I think that's
Speaker 1: a recognition that many people are not seeing how extreme
Speaker 1: financialization or hyper globalization is actually benefiting them. I like that.
Speaker 1: I like that phrase that you use. Siblings and so this,
Speaker 1: you know, and we think, I remember the late nineties
Speaker 1: and there's uh just so much optimism about free trade
Speaker 1: and international investments and opening up emerging markets and so forth.
Speaker 1: And your view is like, we can have trade, and
Speaker 1: we can have the benefits of trade, even if we
Speaker 1: sort of even if country is adopted perhaps more conservative
Speaker 1: and cautious view on the sort of the financial from
Speaker 1: the financial perspective. Yeah, exactly. I think I think some
Speaker 1: amount of financial globalization has to proceed to back up
Speaker 1: the increased trade links, but it doesn't have to be
Speaker 1: necessarily to the extent that we have and particularly hot money.
Speaker 1: And again I go back to stan Fisher. I mean,
Speaker 1: you know, if stan Fisher, when he was Governor of
Speaker 1: the Bank of Israel couldn't see what benefit he was
Speaker 1: getting from short term hot money flows, we all have
Speaker 1: to ask ourselves. I mean, you know, what what is
Speaker 1: it that these flows are doing, and if they are
Speaker 1: bringing benefits, I think it's it's something that needs to
Speaker 1: be demonstrated. So yeah, I think even for the benefits
Speaker 1: to you know, like what percosh mentions for the benefits
Speaker 1: to flow through. For people to recognize that, I think
Speaker 1: you probably need to take a step back and and look,
Speaker 1: how you know, we need to evolve this into a
Speaker 1: more kind of a sustainable proposition so that the benefits,
Speaker 1: you know, is seeing by the people who are who
Speaker 1: are consuming. So so, just to go back to sort
Speaker 1: of the theory that we talked about at the start
Speaker 1: about why foreign capital helps, you know, one way foreign
Speaker 1: capital helps is that you know, it matches foreign capital
Speaker 1: to deserving recipients within within the country. But what about
Speaker 1: a country where a large fraction of the people don't
Speaker 1: have bank accounts, they're not really plugged into any system
Speaker 1: where they could draw on on this foreign capital. And
Speaker 1: that's some of the work, to its credit, that the
Speaker 1: I m F has done is on financial inclusion, and
Speaker 1: that has led to the recognition that, gum, yes, we
Speaker 1: thought foreign capital should be benefiting lots of people, but hey,
Speaker 1: what about these folks who are just completely unplugged from
Speaker 1: the financial system in their domestic economies. How how in
Speaker 1: the heck did we think they are going to benefit?
Speaker 1: And so, you know, that's that's been part of the
Speaker 1: rethinking is to say, look, guys, we need to be
Speaker 1: not just spouting the theory. We need to think about how,
Speaker 1: you know, people on the ground are going to benefit
Speaker 1: from this foreign capital. So I think that's that's been
Speaker 1: a very salutary lesson both of you. Percash and Sharon,
Speaker 1: thank you so much for joining us. Thanks guys, thanks show,
Speaker 1: Thanks Tracy. I've always enjoyed this podcast. Good to be
Speaker 1: on it. Thanks, that means a lot, so glad to
Speaker 1: have you both. That was a really enjoyable conversation, interesting topic.
Speaker 1: You know, it got me what we were thinking talking
Speaker 1: about at the end. You know, it definitely reminded me
Speaker 1: of our conversation earlier in the year with Matt Klein,
Speaker 1: the author of Trade Wars are classmar just this idea
Speaker 1: of unfettered trade, or particularly unfettered flow of capital, exacerbating
Speaker 1: domestic inequalities and creating a situation which you end up
Speaker 1: with a large portion of the public that just doesn't
Speaker 1: see the benefit of sort of like openness to the world. Yeah,
Speaker 1: absolutely right. It's sort of the financialization flip side of
Speaker 1: the like hard flow of goods, isn't it. But I
Speaker 1: thought that whole discussion was really really interesting I thought,
Speaker 1: I don't know, everyone has this idea of the I
Speaker 1: m F as this really like slow and lumbering bureaucracy
Speaker 1: that never really changes its mind. But it's interesting to
Speaker 1: see the beginnings of a policy shift playing out in
Speaker 1: real time. It's definitely a slow process, but it does
Speaker 1: seem to be happening. Yeah, it seems to be happening.
Speaker 1: And the framework or the way and your question really
Speaker 1: got at it. But the way they talked about is coherent.
Speaker 1: It's like they're not going the I m F is
Speaker 1: not any time going to give up on a general
Speaker 1: view that globalization is good, and free trade is good
Speaker 1: and even open capital accounts are good. But tactically to
Speaker 1: get from here to there, if you move too fast,
Speaker 1: if you if countries don't have the tools to prevent crises,
Speaker 1: then you'll never like get to that at endpoint. Yeah,
Speaker 1: I mean, I think there's a growing recognition that there
Speaker 1: if you're going to pursue globalization for all, thinking that
Speaker 1: it's going to benefit everyone, if there are pockets that
Speaker 1: aren't seeing those benefits, that are being challenged, it's okay
Speaker 1: to do sort of pinpoint policies to address what those
Speaker 1: issues are. It doesn't mean you've completely backed away from
Speaker 1: liberalizing the current account or free trade altogether, which again
Speaker 1: is like, is a huge policy shift. Well, Tracy cannot
Speaker 1: compliment you on something. Oh, no, one. I was really
Speaker 1: impressed that on the fly you were able to remember
Speaker 1: the three the three corners of the tried Lemma or
Speaker 1: the impossible trinity as soon as you said, like, I
Speaker 1: feel like it wasn't on the fly. Oh were you
Speaker 1: were you googling it at the time. It wasn't on
Speaker 1: the I wrote it down. Well, I was, no, I
Speaker 1: wrote it down before we had this conversation. You knew
Speaker 1: it was going to come up, right. I really thought
Speaker 1: that you just sort of extemporaneously remembered the three, uh,
Speaker 1: the three. I'm still impressed that you, like at the
Speaker 1: beginning of the conversation that you knew to have it.
Speaker 1: I'm not quite as impressed that you like wrote it
Speaker 1: down and like googled it beforehand. But it was still
Speaker 1: smart to anticipate that we were going to go there
Speaker 1: to have them at your disposal, And the way you
Speaker 1: said it, it it kind of sounded like you were like
Speaker 1: thinking about it at the time. So it's just well done.
Speaker 1: That's because I was desperately searching for my notes to
Speaker 1: find the last one. Um, no, okay, maybe I shouldn't
Speaker 1: have said anything. Yes, Joe, I remembered it and you
Speaker 1: know it's all in my head. Okay, shall we leave
Speaker 1: it there? Yeah, let's leave it there. Okay. This has
Speaker 1: been another episode of the All Thoughts Podcast. I'm Tracy Alloway.
Speaker 1: You can follow me on Twitter at Tracy Alloway and
Speaker 1: I'm Joe wi isn't Thal. You could follow me on
Speaker 1: Twitter at the Stalwork and you should go check out
Speaker 1: the report from our guests. There are two of the
Speaker 1: tributors the I M F Advice on Capital Flows Evaluation Report.
Speaker 1: I want to thank our guests Perkash lung Ghani and
Speaker 1: Shi ram Bala Supermanion, and be sure to follow our
Speaker 1: producer Laura Carlson. She's at Laura M. Carlson. Followed the
Speaker 1: Bloomberg head of podcast, Francesca Levi at Francesca Today and
Speaker 1: check out all of our podcasts under the handle at podcast.
Speaker 1: Thanks for listening.