Eurodad: Experts argue the world can learn from Latin American experience
December 15th, 2011
LONDON – Regulating cross-border financial flows can contribute to financial stability and help countries develop, according to new research to be published on 15 December by the Bretton Woods Project and Latindadd.
The report find that sudden surges and stops in cross-border financial flows, which have been increasing in frequency, risk generating new financial crises in both rich and poor countries.
A report by the Bretton Woods Project, Time for a new consensus, “explains the drawbacks, especially for development, of policies to deregulate the movement of money across borders, and makes suggestions for a new pragmatic approach to regulation of financial flows to ensure stability and development.” It argues that these flows should be managed more effectively in both source countries (like the US and UK) and recipient countries (like Brazil and Turkey).
Peter Chowla, Bretton Woods Project programme manager, said:
“The massive storm brewing in Europe makes it all the more important that countries prepare themselves for dangerous economic shocks, especially risk aversion by investors and capital flight. Developing countries need to put in place pragmatic, preventative regulations that can help prevent financial speculators wreaking havoc.”
A second report, published jointly by the Bretton Woods Project and Peru-based network Latindadd, Breaking the Mould, examines policies in Argentina, Brazil and Costa Rica to show how capital account regulations can help not only achieve financial stability, but also prevent unwarranted appreciation of the exchange rate and increase the ability to use monetary policy effectively. It finds that regulations on financial flows have a role in supporting broader development goals like employment creation and poverty reduction.
Jorge Coronado, an expert consultant for Latindadd, said: “The Latin American experience provides important lessons for Europe and the rest of the world. Development goals are best achieved by combining sensible regulation of finance with progressive economic policies. ”
Juan O’Farrell of the Bretton Woods Project said: “With Brazil joining Argentina in scepticism of too much reliance on volatile capital markets, Latin America is staking out a strong position in the G20 that excessive globalisation of finance is too dangerous.”
For information:
Peter Chowla, +44 (0) 7877 596 893 / pchowla@brettonwoodsproject.
Juan O’Farrell, +44 (0) 203 122 0728 / jofarrell@brettonwoodsproject.
Notes to editors
A preview of Time for a new consensus is available at
http://brettonwoodsproject.
A preview of Breaking the Mould is available at:
http://brettonwoodsproject.
Time for a new consensus explains the drawbacks, especially for development, of policies to deregulate the movement of money across borders. It also looks at the potential advantages of regulating flows, despite the assumption of international institutions such as the IMF and World Trade Organisation (WTO), as well as in the European Union and rich country governments, that this will be harmful. It argues that a new consensus around prudential and pragmatic capital account policies and their enforcement can facilitate financial stability, sustainable growth, and social development.
Breaking the Mould looks in depth at capital account regulations implemented in Argentina, Brazil and Costa Rica. While in Argentina the capital account regulations implemented since the 2001 crisis are part of a comprehensive policy ‘toolkit’ which represents a U-turn from 1990s financial liberalisation, in Brazil and Costa Rica the measures implemented come as isolated policies responding to a particular context of high capital inflows stimulated by low interest rates in rich countries. The report argues that the policy changes in these three countries are just first steps in the shift towards capital account regulations that work for the people. In order to increase the effectiveness and development impact of capital account management techniques they have to be implemented early on as part of a comprehensive policy framework and not just as last resort, as advocated by the IMF.
Some new, but limited, thinking on these risks has emerged from the Bank of England and from the IMF in recent weeks. However, the Eurozone crisis will make consideration of regulation of cross-border financial flows even more important, as any country leaving the Eurozone will have to design policies to prevent massive capital flight. These policies are currently forbidden under the EU’s Lisbon Treaty.
On Monday, 12 December, the Bank of England published two new financial stability papers:
- FS Paper No 13, Reform of the International Monetary and Financial System, by Oliver Bush, Katie Farrant and Michelle Wright.
- FS Paper No 12, The future of international capital flows, by William Speller, Gregory Thwaites and Michelle Wright.