13 March 2010

Capital controls back in favour!

Well well, the IMF has reversed its policy on capital controls last month..read Dani Rodrik on Project Syndicate on this

In the world of economics and finance, revolutions occur rarely and are often detected only in hindsight. But what happened on February 19 can safely be called the end of an era in global finance.
On that day, the International Monetary Fund published a policy note that reversed its long-held position on capital controls. Taxes and other restrictions on capital inflows, the IMF’s economists wrote, can be helpful, and they constitute a “legitimate part” of policymakers’ toolkit.
Rediscovering the common sense that had strangely eluded the Fund for two decades, the report noted: “logic suggests that appropriately designed controls on capital inflows could usefully complement” other policies. As late as November of last year, IMF Managing Director Dominique Strauss-Kahn had thrown cold water on Brazil’s efforts to stem inflows of speculative “hot money,” and said that he would not recommend such controls “as a standard prescription.”

Copyright: Project Syndicate, 2010.
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This is a major shift in thinking. Rodrik points out that the combination of economists ideas and political power with the banks made finance lethal in the past. This is set to change, even though political power remains, the intellectual climate has changed significantly. 

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