International Monetary Fund recants on open capital flows says Productive Economy Council

“The IMF has recognised and publically admitted there is a need for restricting capital flows from country to country under certain conditions,” says Selwyn Pellett of the Productive Economy Council.

The IMF’s executive board said that capital controls are “squarely within the toolkit”. Most of its directors “broadly supported the substance of the proposed policy framework” - suggesting there is greater consensus than before between developed and developing countries on the use of controls.

“This is what we at the PEC have been saying and advocating for some time and it’s reassuring this thinking is finally becoming mainstream. For those who have advocated the free flow of capital under any conditions this announcement will be a jolt to their belief system,” says Pellett. “Economists around the world will have to rethink their training as clearly one model does not fit all circumstances.”

As has been highlighted by the Financial Times this represents a huge shift in thinking from the IMF - which previously advocated the full and free flow of capital. For those interested in following the progressive change in the IMF’s thinking, it started with a few papers written after the Asian Financial Crisis. These papers highlighted the fact that countries with more exotic approaches to capital flows and monetary policy had actually fared much better during and after the crisis. After the Global Financial Crisis more papers were written saying the same thing.

It is this practical, observable and measurable approach to economics that has been missing for a very long time and it’s refreshing to see it slowly returning. Faith might be OK in religion, but it should not apply to economics.

Small open economies like New Zealand should embrace any tools that will protect their productive economies from derivative or speculative economy. Labour has moved in this direction with the abandonment of consensus around monetary policy announced by David Parker in 2010. Now would be a very opportune time for Bill English to look at the same evidence as the IMF and embrace its recommendations so we can start to protect New Zealand’s real / export economy.

This progressive shift in thinking has also reached the Reserve Bank with Dr Bollard’s recent speech in Sydney regarding the use of “Loan to Value Ratios” and bringing forward “Capital Adequacy” regulations for farm lending. While these could be described as baby steps, the IMF announcement should give RBNZ the confidence to implement these changes quickly.

“We must protect our real economy. It creates real jobs, pays real bills and deals with our balance of payments and national debt,” says Pellett.

“The derivative or financial economy, which rides above the real economy, makes a lot of money for a select few - often off shore. This creates few jobs and does very serious damage to the real economy and national debt. This is now recognized by the IMF, and it’s time we followed suit.”

ENDS

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