Question

In 1997, the IMF proposed changing its charter to promote capital account liberalization. By 2012, it had changed its position and accepted the use of capital controls. Why did the IMF reverse its position on capital controls?

Answer 1

The IMF has come a long way since 2005 in clarifying, enhancing, and communicating its approach to capital account liberalization. Within the last five years, it issued the 2012 Integrated Surveillance Decision that elucidated the place of capital account issues in bilateral and multilateral surveillance, and developed an institutional view on the liberalization and management of capital flows. IMF staff produced and synthesized a substantial amount of academic and operational research on capital account liberalization and capital controls, and developed new multilateral surveillance products (e.g., spillover reports) that allow for greater attention to push factors affecting international capital flows. In the process, the Fund has also internalized many of the substantive lessons from past IEO evaluations (highlighted in IEO, 2014a) on the importance of providing clear Board guidance; explicitly taking into account, in policy and practice, different country circumstances and the need for evenhandedness; and breaking down internal silos.

In the wake of the crisis the IMF surprised many observers by openly embracing capital controls to both prevent and mitigate financial crises. The IMF supported the use of capital controls on inflows in a number of countries such as Brazil and South Korea (Gallagher, 2015). Most surprising to many was the IMF’s outright advocacy for the use of capital controls on outflows in Iceland as part of that country’s post crisis stand-by-agreement.

In some ways, advocating for the appropriate use of capital controls is new policy at the IMF. In 2012, the IMF adopted a ‘new institutional view’ on capital account liberalization and controls that states that capital account liberalization is not always optimal and that under certain conditions capital controls on inflows and outflows can be appropriate to prevent and mitigate financial instability (IMF, 2012). This shift has received a significant amount of attention, however there is yet to be a rigorous account of whether the IMF has put its new words into action.