Statement on the Use of Capital Controls to Prevent and Mitigate Financial Crises

SIGN-ON LETTER:

We, the undersigned economists and policy analysts, write to alert you to important new developments in the economics literature pertaining to prudential financial regulations, and to express particular concern regarding the extent to which capital controls are restricted in U.S. trade and investment treaties.

Authoritative research recently published by the National Bureau of Economic Research, the International Monetary Fund, and elsewhere has found that limits on the inflow of short-term capital into developing nations can stem the development of dangerous asset bubbles and currency appreciations and generally grant nations more autonomy in monetary policy-making.[i]

Given the severity of the global financial crisis and its aftermath, nations will need all the possible tools at their disposal to prevent and mitigate financial crises. While capital account regulations are no panacea, this new research points to an emerging consensus that capital management techniques should be included among the “carefully designed macro-prudential measures” supported by G-20 leaders at the Seoul Summit.[ii] Indeed, in recent months, a number of countries, from Thailand to Brazil, have responded to surging hot money flows by adopting various forms of capital regulations.

We also write to express our concern that many U.S. free trade agreements and bilateral investment treaties contain provisions that strictly limit the ability of our trading partners to deploy capital controls. The “capital transfers” provisions of such agreements require governments to permit all transfers relating to a covered investment to be made “freely and without delay into and out of its territory.”

Under these agreements, private foreign investors have the power to effectively sue governments in international tribunals over alleged violations of these provisions. 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 and require an extended “cooling off” period before investors may file their claims.[iii] However, these minor reforms do not go far enough to ensure that governments have the authority to use such legitimate policy tools. The trade and investment agreements of other major capital-exporting nations allow for more flexibility.

We recommend that U.S. FTAs and BITs permit governments to deploy capital controls responsibly without being subject to challenge, as part of a broader menu of policy options to prevent and mitigate financial crises.

Sincerely,

(Initial signatories as of 12/13/2010)

Ricardo Hausmann, Director, Harvard University Center for International Development

Dani Rodrik, Rafiq Hariri Professor of International Political Economy, John F. Kennedy School of Government, Harvard University

Olivier Jeanne, Professor of Economics, Johns Hopkins University, and Senior Fellow, Peterson Institute for International Economics

Pranab Bardhan, Professor of Economics, University of California, Berkeley

Lance Taylor, Department of Economics, New School for Social Research

Jose Antonio Ocampo, School of International and Public Affairs, Columbia University

Joseph Stiglitz, University Professor, Columbia University, Nobel laureate

Stephany Griffith-Jones, Initiative for Policy Dialogue, Columbia University

Ethan Kaplan, IIES, Stockholm University and Columbia University

Dimitri B. Papadimitriou, President, The Levy Economics Institute of Bard College

Ilene Grabel, Josef Korbel School of International Studies, University of Denver

Alice Amsden, Department of Urban Studies and Planning, MIT

Gerald Epstein, Department of Economics, University of Massachusetts-Amherst

Kevin P. Gallagher, Department of International Relations, Boston University

Sarah Anderson, Global Economy Project Director, Institute for Policy Studies

Arindrajit Dube, Department of Economics, University of Massachusetts-Amherst

William Miles, Department of Economics, Wichita State University

Adam Hersh, Center for American Progress

James K. Galbraith, Lloyd M. Bentsen Jr. Chair in Government/Business Relations and Professor of Government, University of Texas at Austin

Paul Blustein, Nonresident Fellow, the Brookings Institution, and Senior Visiting Fellow, Centre for International Governance Innovation

Anton Korinek, Department of Economics, University of Maryland

________________________________

[i] For some of the most important recent studies see: Ostry JD, Ghosh AR, Habermeier K, Chamon M, Qureshi MS and Reinhardt DBS (2010). Capital Inflows. The Role of Controls. IMF Staff Position Note, SPN/10/04. Washington, DC, International Monetary Fund. Magud N and Reinhart CM (2006). Capital Controls: An Evaluation. NBER Working Paper 11973. Cambridge, MA, National Bureau of Economic Research. Further studies are available upon request.

[ii] “Seoul Summit Document,” Nov. 12, 2010.

[iii] See, for example, Annex 10-E of the U.S.-Peru FTA.

SIGN-ON LETTER:

We, the undersigned economists and policy analysts, write to alert
you to important new developments in the economics literature
pertaining to prudential financial regulations, and to express
particular concern regarding the extent to which capital controls are
restricted in U.S. trade and investment treaties.

Authoritative research recently published by the National Bureau of
Economic Research, the International Monetary Fund, and elsewhere has
found that limits on the inflow of short-term capital into developing
nations can stem the development of dangerous asset bubbles and
currency appreciations and generally grant nations more autonomy in
monetary policy-making.[i]

Given the severity of the global financial crisis and its aftermath,
nations will need all the possible tools at their disposal to prevent
and mitigate financial crises.  While capital account regulations are
no panacea, this new research points to an emerging consensus that
capital management techniques should be included among the “carefully
designed macro-prudential measures” supported by G-20 leaders at the
Seoul Summit.[ii]  Indeed, in recent months, a number of countries,
from Thailand to Brazil, have responded to surging hot money flows by
adopting various forms of capital regulations.

We also write to express our concern that many U.S. free trade
agreements and bilateral investment treaties contain provisions that
strictly limit the ability of our trading partners to deploy capital
controls. The “capital transfers” provisions of such agreements
require governments to permit all transfers relating to a covered
investment to be made “freely and without delay into and out of its
territory.”

Under these agreements, private foreign investors have the power to
effectively sue governments in international tribunals over alleged
violations of these provisions. 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 and require an
extended “cooling off” period before investors may file their
claims.[iii] However, these minor reforms do not go far enough to
ensure that governments have the authority to use such legitimate
policy tools. The trade and investment agreements of other major
capital-exporting nations allow for more flexibility.

We recommend that U.S. FTAs and BITs permit governments to deploy
capital controls responsibly without being subject to challenge, as
part of a broader menu of policy options to prevent and mitigate
financial crises.

Sincerely,

(Initial signatories as of 12/13/2010)

Ricardo Hausmann, Director, Harvard University Center for
International Development
Dani Rodrik, Rafiq Hariri Professor of International Political
Economy, John F. Kennedy School of Government, Harvard University
Olivier Jeanne, Professor of Economics, Johns Hopkins University, and
Senior Fellow, Peterson Institute for International Economics
Pranab Bardhan, Professor of Economics, University of California, Berkeley
Lance Taylor, Department of Economics, New School for Social Research
Jose Antonio Ocampo, School of International and Public Affairs,
Columbia University
Joseph Stiglitz, University Professor, Columbia University, Nobel laureate
Stephany Griffith-Jones, Initiative for Policy Dialogue, Columbia University
Ethan Kaplan, IIES, Stockholm University and Columbia University
Dimitri B. Papadimitriou, President, The Levy Economics Institute of
Bard College
Ilene Grabel, Josef Korbel School of International Studies, University of Denver
Alice Amsden, Department of Urban Studies and Planning, MIT
Gerald Epstein, Department of Economics, University of Massachusetts-Amherst
Kevin P. Gallagher, Department of International Relations, Boston University
Sarah Anderson, Global Economy Project Director, Institute for Policy Studies
Arindrajit Dube, Department of Economics, University of Massachusetts-Amherst
William Miles, Department of Economics, Wichita State University
Adam Hersh, Center for American Progress
James K. Galbraith, Lloyd M. Bentsen Jr. Chair in Government/Business
Relations and Professor of Government, University of Texas at Austin
Paul Blustein, Nonresident Fellow, the Brookings Institution, and
Senior Visiting Fellow, Centre for International Governance Innovation
Anton Korinek, Department of Economics, University of Maryland

________________________________

[i] For some of the most important  recent studies see:  Ostry JD,
Ghosh AR, Habermeier K, Chamon M, Qureshi MS and Reinhardt DBS (2010).
Capital Inflows. The Role of Controls. IMF Staff Position Note,
SPN/10/04. Washington, DC, International Monetary Fund.  Magud N and
Reinhart CM (2006). Capital Controls: An Evaluation. NBER Working
Paper 11973. Cambridge, MA, National Bureau of Economic Research.
Further studies are available upon request.

[ii] “Seoul Summit Document,” Nov. 12, 2010.

[iii] See, for example, Annex 10-E of the U.S.-Peru FTA.

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