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The International Monetary Fund (IMF) seeks to play a more prominent role in regulating cross-border capital flows. The current patchy economic recovery, which has key emerging markets recovering faster than advanced economies, has contributed to an increase of funds flowing from the advanced to the emerging economies. Investors in advanced economies are seeking higher returns than are available in nations where interest rates are still low. The increase of capital flows into developing economies has contributed to an increase in their currency values and possible asset bubbles forming. Nations such as Brazil, South Korea and Thailand have imposed capital controls to stem the inflow of foreign funds, including taxes on capital inflows and policies designed to shift the length of investment maturities for foreign inflows to longer-term investments.

In a just-released report that was discussed at the December 17 meeting of the IMF’s executive board, IMF officials indicate that the organization should be playing a more active role in monitoring cross-border capital flows. Capital flow restrictions designed to address one nation’s domestic concerns can have significant effects on other countries. The IMF wants to develop guidelines on how nations can effectively use capital flow restrictions and wants increased power to oversee nations who may be misusing capital flow restrictions. Previously the IMF had opposed capital flow restrictions since the inflow of foreign funds helped to promote investment and growth in those economies, but the Asian financial crisis and the events of the current crisis highlighted the dangers to economies when too much foreign capital pulls out of a market at once.

QUESTIONS FOR DISCUSSION:

  1. Analyze the advantages and disadvantages for nations of implementing capital flow restrictions. What are the benefits of allowing foreign capital inflows?
  2. The global economy seems to be moving away from a spirit of cooperation with nations less willing today than they were in 2008 to work collaboratively to find solutions to the economic crisis. Is it likely that nations would support the IMF taking a lead role in crafting policies for cross-border capital flows?
  3. Some of the recommendations proposed by the IMF would require changes to IMF bylaws to give the organization more power. Given that outright opposition by the United States could doom any plan because of the concentration of U.S. voting power for IMF affairs, how could the IMF convince the United States to accept an increased role for the IMF in monitoring the international monetary system?

SOURCE: Talley, I. (2011, January 6). IMF eyes more say over flow of capital. Wall Street Journal, p. C3.  (Retrievable online at: http://online.wsj.com/article/SB10001424052748703675904576064233644690302.html)

Related video clip available at:

http://www.imf.org/external/mmedia/index.aspx#

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