As countries try to export their way back to prosperity, the IMF's change of heart on capital controls is necessary and welcome
The International Monetary Fund (IMF) was once implacable on the issue of capital controls. Member states were told to dismantle restrictions on the free movement of money around the world, as important for the smooth running of the global economy as the free movement of goods.
In those heady days, the IMF had a set view about how the world should be run. Markets should be as free as possible, poor countries should privatise state-run industries and open themselves up to inward investment. Restrictive barriers were to be dismantled, taxes cut, public spending squeezed. There was no risk from the speculative activities of banks and no danger that housing bubbles would get out of hand. Precious little of the once all-conquering Washington consensus has escaped scrutiny, including the blanket opposition to capital controls.
This week, the IMF published its latest thinking on capital market liberalisation. Its conclusion? Controls on capital had their uses, countries should dismantle controls only when they were absolutely sure they could cope with the possible hot money flows that might result, and should have the right to take action to prevent their economies being blown out of the water either by the rapid exchange-rate appreciation that accompanies rapid inflows of foreign money or the depreciation that accompanies its departure.
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