The world's economic leaders are expected to agree next week on the need for a new system to oversee international capital flows. But a decision on what exactly the guidelines should be, and how to enforce them, could prove a much thornier issue.
Finance officials from the Group of 20 world's largest economies and representatives of international financial institutions are due to gather on February 18 and 19 for the first high-level meeting under France's year-long G-20 presidency. Against the backdrop of a wobbly global economy, officials plan to tackle the euro-zone debt crisis, currency policy, financial regulation and a raft of other economic problems ailing rich and developing countries alike. They also may discuss how to better represent non-G-20 countries at future meetings.
One point of convergence, according to interviews with several G-20 officials, is the need to create new conditions under which a country can impose capital controls, which are essentially a way to regulate capital flows via taxes or other administrative measures. The International Monetary Fund would be likely to take a leading role in any new framework, these people said."There's broad agreement that....guidelines may be a useful way forward," John Lipsky, first managing director of the IMF said in an interview. But he added: "I don't think ... there would be agreement quickly on a set of iron-clad laws or rules, that's probably for down the road."
The effort to create new capital-control rules is one of the indirect ways in which the French presidency of the G-20 hopes to spark a broader discussion of exchange rates. French officials say that defining clear guidelines to help emerging countries cope with sudden overheatings of their economies due to capital surges will reduce currency volatility.
Paris would like to include Beijing in a currency debate. China's trading partners would like Beijing to let the yuan rise in order to make their exports more competitive in China's vast domestic market. Chinese officials have so far resisted letting their currency strengthen at a pace other G-20 members want—and have been wary to even discuss the subject on the international stage. One way President Nicolas Sarkozy is trying to lure Beijing to the negotiating table is by suggesting the yuan take greater responsibility within the global economic system. Last month, Mr. Sarkozy said the G-20 could agree on a date at which the yuan would be included in the IMF's basket of currencies that fund members use as a reserve asset, its so-called Special Drawing Rights.
Capital controls are increasingly being used by emerging economies to manage exchange rates. Since the end of the financial crisis, investment money has flooded into emerging economies because growth prospects are higher there than in mature economies. That puts upward pressure on their currencies, which reduces export competitiveness.
In October of last year, for example, Brazil doubled a tax it charges foreigners on investments in fixed-income securities. South Korea put a cap on banks' foreign-exchange derivative books and raised taxes on foreign purchase of government bonds to curb volatility caused by capital inflows. Thailand is imposing a 15% tax on interest-rate income and capital gains earned by foreign investors.
It is unclear how far any new G-20 framework on capital controls would limit such moves.
The IMF has one proposal in the works and has drafted a list of conditions under which capital controls would be appropriate when all other macroeconomic policy options have been exhausted. The options listed by the IMF include adjusting exchange rates, allowing reserve accumulation and raising key interest rates.
The IMF's role in such a proposed scenario would be "making sure, for instance, that capital control measures don't serve as excuses for keeping a currency artificially under or overvalued," said former IMF managing director Michel Camdessus said. Mr. Camdessus is one of the authors of a report commissioned by Mr. Sarkozy on how to revamp the international monetary system.
Any new IMF oversight would likely encounter resistance from emerging economies that are keen to defend their ability to stem destabilizing flows of capital. Some emerging economies are particularly wary of giving the IMF too much power, especially on currency matters.
On its part, the U.S. broadly agrees to allow new guidelines on capital controls, though is likely to want any new rules to state specifically that these controls only be used as a "last resort." G-20 insiders say the reason for the U.S.' softening position is that Washington is aware of the anger triggered in emerging nations by the Federal Reserve's decision to massively pump liquidity into the U.S. economy, a move that accelerated capital flows into emerging economies.
Complicating matters further, China is likely to object to a last-resort specification; Beijing wants to preserve both the ability to adjust its exchange rate at its own pace and implement capital controls, G-20 officials say. "China won't be told it can't have capital controls because the yuan is undervalued," one G-20 official said.
U.S. Treasury Secretary Timothy Geithner went to Brazil earlier this week partly in order to garner support in the G-20 from a nation that has seen capital controls as necessary. Mr. Geithner, instead of condemning Brazil's stemming of inflows through higher taxes on foreign investment, called Brazil's use of controls "pragmatic." He then said that China's undervalued yuan forced other emerging countries to bear the brunt of the negative effects of surging capital flows.
Source: http://online.wsj.com
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