The Rebranding of Capital Controls in an Era of Productive Incoherence

The re-branding of capital controls has occurred against a broader backdrop of change and uncertainty. This state of affairs—which I have elsewhere termed “productive incoherence”--constitutes the broader environment in which thinking and practice on capital controls is now evolving. The present incoherence is, in my view, productive because it has widened the space around capital controls to a greater and more consistent degree than in the years that followed the East Asian crisis of 1997-98. How are we to account for this extraordinary ideational and policy evolution on capital controls during the current crisis? I examine five factors that, in my view, must appear in any comprehensive account of the evolving re-branding of capital controls during the current crisis. These include: (1) the rise of increasingly autonomous developing states, largely as a consequence of their successful responses to the Asian financial crisis; (2) the increasing self confidence and assertiveness of their policymakers in part as a consequence of their relative success in responding to the current crisis at a time when many advanced economies faltered badly; (3) a pragmatic adjustment by the IMF to an altered global economy in which its influence has been severely restricted; (4) the intensification of the need for capital controls by countries at the extremes—i.e., not just those that faced implosion and thereby threatened cross-national contagion, but also and far more importantly by those that fared “too well” during the current crisis; and (5) changes in the ideas of academic economists and among IMF staff. I conclude by exploring in passing important tensions that have emerged in conjunction with the re-branding of capital controls. Paramount in this regard are the efforts by IMF staff and some academic economists to “domesticate” the discussion and use of capital controls, in part by the implementation of (something akin to) a “code of conduct” to regulate and constrain capital account interventions.