Info Service on WTO and Trade Issues (Mar12/01)
Economists call for capital controls in US-led trade pact
(An earlier version of this article was published in SUNS#7320 dated 1 March 2012)
Kuala Lumpur, 29 Feb (Fauwaz Adbul Aziz) – More than 100 prominent economists from the Asia Pacific region have urged negotiators of the nine-country Trans-Pacific Partnership Agreement (TPPA) talks to ensure that the eventual document their governments sign on to does not preclude, or impose sanctions against, the use of capital controls.
The TPPA is an initiative of the US and as in other recent bilateral free trade agreements, it has triggered widespread protests from a wide ranging spectrum of civil society organisations.
The latest to voice deep concerns, this time over the need for capital controls to be retained as a policy tool to prevent financial crisis, are economists from six of the nine TPPA countries - Australia, Chile, Malaysia, Peru, New Zealand, and the United States. The other participating countries in the TPPA are Brunei, Singapore, and Vietnam. Trade officials will meet March 1-9 in Melbourne, Australia for the 11th round of negotiations.
In a letter to the heads of foreign affairs and international trade of the six countries dated on 28 February the signatories call for negotiators of the TPPA to recognize that capital controls are legitimate prudential financial regulations that should not be subject to investor claims under trade and investment treaties. In the face of the curtailment of capital controls in bilateral trade and investment agreements, the economists’ statement reflects a growing consensus that capital controls are legitimate policy tools.
Following the financial crises that have struck economies – most notably after 1997 following the Asian financial crisis – it was seen how governments saw it prudent not to let go of the ability to re-regulate their way out of the crisis.
Malaysia's capital controls – against the contrary prescriptions of liberalization and deregulation advocates such as the International Monetary Fund (IMF) – were found to have buffered the country from the worst impacts of the 1997 episode.
In fact, the IMF has since abandoned its blanket opposition to capital controls.
In a recent and landmark study reviewing the experiences of post-Asian crisis capital controls, an econometric analysis conducted by the IMF found that countries that used capital controls fared better than countries that did not use them in the run-up to the current crisis: "The use of capital controls was associated with avoiding some of the worst growth outcomes associated with financial fragility," said the Fund.
Since the 1997 episode, the U.S. government, on the other hand, has gone ahead to initiate agreements with 22 more countries, which have worked towards restricting capital controls.
In their 28 February letter the economists said that nearly all U.S. trade agreements and bilateral investment treaties have strictly limited the ability of trading partners to deploy capital controls – with no safeguards for times of crisis. According to the letter, “a few recent U.S. trade agreements put some limits on the amount of damages foreign investors may receive as compensation for certain capital control measures. They also extend the “cooling off” period before investors may file claims in international tribunals. However, these minor reforms do not go far enough to ensure that governments have the authority to use such legitimate policy tools”.
Thus they called for the negotiating governments to ensure that the TPPA "permit governments to deploy capital controls without being subject to investor lawsuits, as part of a broader menu of policy options to prevent and mitigate financial crises."
The letter cited recent studies and stated that “Authoritative research published by the National Bureau of Economic Research, the International Monetary Fund, and other institutions has found that limits on short-term capital flows can stem the development of dangerous asset bubbles and currency appreciations, and grant nations more autonomy in monetary policy-making, and protect nations from the dangers of abrupt capital flight”.
The signatories stressed that “the U.S. government’s rigid opposition to capital controls does not reflect the global norm” and that “other TPP countries typically allow more flexibility in their trade and investment treaties”.
They further said that “while capital controls and other capital management techniques are no panacea for financial instability, there is an emerging consensus that they are an important part of the macro-economic toolkit" and also referred to the endorsement by G-20 leaders of the following statement at the 2011 Cannes Summit:
“Capital flow management measures may constitute part of a broader approach to protect economies from shocks. In circumstances of high and volatile capital flows, capital flow management measures can complement and be employed alongside, rather than substitute for, appropriate monetary, exchange rate, foreign reserve management and prudential policies."
Among the endorsers of the letter are Jagdish Bhagwati of Columbia University, former IMF officials Olivier Jeanne (currently of Johns Hopkins University) and Arvind Subramanian (currently of Peterson Institute for International Economics), executive director to the IMF for Southern Cone Latin American Countries, Guillermo Le Fort Varela, former director of Research at Chile's Central Bank, Ricardo Ffrench-Davis, South Centre Executive Director Martin Khor and Michael Mah-Hui Lim of the Penang Institute in Malaysia. Kevin Gallagher, Boston University professor and research associate at the Global Development and Environment Institute at Tufts University (GDAE), and Sarah Anderson, director of the Global Economy Project at the Institute for Policy Studies, initiated the statement. In 2009, Gallagher and Anderson examined this issue as members of the Investment Subcommittee of the State Department's Advisory Committee on International Economy Policy.
“This will be the first major trade agreement to be negotiated since the 2008 financial crisis,” notes Anderson in a statement released online on 28 February. “It would be a shame if leaders in the Trans-Pacific region did not use this opportunity to ensure that governments have a full menu of policy options for preventing such catastrophes in the future.”
Gallagher, meanwhile, noted that the Trans-Pacific region has in the past been susceptible to volatile capital flows and that the governments involved in these talks themselves have a track record of regulating capital flows so as to stabilise while growing their economies.
"We want to send a message that no government should have to give up a proven tool for combating the financial volatility which has caused so much suffering around the world."
For the full statement and the endorsers please see: http://www.ase.tufts.edu/gdae/policy_research/TPPAletter.html