[OPE] Capital controls

From: Jurriaan Bendien <adsl675281@telfort.nl>
Date: Tue Dec 01 2009 - 15:44:39 EST

Arvind Subramanian provides a case for capital controls:

...foreign capital can be good for emerging markets because it brings down
the cost of capital for domestic firms, provides finance, facilitates
greater investment, and boosts growth. But, as my co-authors and I have
shown in two papers, the evidence in favor of foreign capital is awfully
hard to find. In part, this is because foreign capital causes the exchange
rate to appreciate which hurts exports, especially in manufacturing, and
growth in the long run. Another reason is that domestic financial systems
and their regulation are not strong enough to prevent and cope with
financial crises that result when foreign capital bolts for the exits. Time
and again we have learnt (or rather failed to learn) that large foreign
capital flows to emerging markets are not sustainable (Latin America 1982;
Asia 1997-98; and Eastern Europe 2008). Think of this: if sophisticated
regulatory systems such as those in the US and Europe cannot avoid financial
crises, how much more vulnerable are emerging markets?

However Reuters' James Saft, noting the introduction of partial capital
controls in Russia, Brazil and Asian countries, is skeptical:

(...) If... these controls are a temporary phase to ease the transition to
stronger currencies, the risks might not be that high. I'd worry that
developed market interest rates are going to stay low for a very long time.
That means that the grand emerging markets carry trade of borrowing in
dollar to speculate for appreciation elsewhere will, as it did in Japan,
build and build. At the same time you have to look at why interest rates
will stay so low for so long. My bet is that it is because consumption in
the developed world will be under structural pressure as debts are repaid.
So the money flows into emerging markets and drives up currencies, but
unless domestic consumption in China and India really takes off there will
not be a very good market for exports. That will make newly strong emerging
market currencies all the harder for those countries to tolerate,
economically and politically. If China does not do its part and allow its
currency to appreciate, the argument will be all the more stark. It may or
may not be a good idea, but one thing I would not count on is coordinated
and globally sanctioned capital controls, as espoused by Arvind Subramanian,
a senior fellow of the Peterson Institute. The US simply won't wear it. Look
then for more unilateral controls and more volatility as speculation of all
kinds grows.

The paradox is that gigantic global capital flows, hailed by
globalisationists, nowadays can get in the way of global commercial trade. I
think personally that James Saft is probably correct - which is to say, that
many countries, depending on their level of integration in the world market
and economic structure, will end up pragmatically introducing some penalties
for shortterm speculative capital one way or another, not so much because
they want to, but because they have to, in defence of their exchange rate
regime. Particularly in smaller export-dependent economies, a lower USD and
shortterm speculative capital inflows and outflows can have big effects on
national income.

Nationmaster provides a quick table of the value of exports as a percentage
of GDP, from which you can learn that there are more than fifty countries in
which the value of exports is more than 50% of their GDP, and more than one
hundred countries where exports are more than 30% of GDP

For comparison, in 1910, on average, the value of exports as a percentage of
GDP was about 14% (Germany 13%, France 15%, UK 18%, USA 6%, Japan 12%) which
is to say that since that time the level of exporting of different countries
in money terms has doubled or even trebled (see Paul Bairoch, Victoires et
Deboires, Vol. 2, p. 308). You obviously have to be a bit careful with this
sort of comparison since nowadays a fraction of goods are also imported for
the purpose of re-export, but there is no denying that the dependence of
national economies on the world market has grown enormously across one

An interesting question is, in a longer term perspective, if shortterm
speculative capital flows are significantly reduced, where does the capital
go? My hunch is: real estate (land and buildings). Real estate prices may
have dipped the last years, but in the long term the movement is up, and
just because Dubai experienced problems, we should not ignore the longer
term trend. The triumph of the rentier is, that he becomes "king of the
castle". Because he owns it. Or rents it out. Or something.


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Received on Tue Dec 1 15:46:41 2009

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