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Policy Space to Prevent and Mitigate Financial Crises in Trade and Investment Agreements

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  • Kevin P. Gallagher

Abstract

Do nations have the policy space to deploy capital controls in order to prevent and mitigate financial crises? This paper examines the extent to which measures to mitigate this crisis and prevent future crises are permissible under a variety of bilateral, regional and multilateral trade and investment agreements. It is found that the United States trade and investment agreements, and to a lesser extent the WTO, leave little room to manoeuvre when it comes to capital controls. This is the case despite the increasing economic evidence showing that certain capital controls can be useful in preventing or mitigating financial crises. It also stands in contrast with investment rules under the IMF, OECD and the treaties of most capital exporting nations which allow for at least the temporary use of capital controls as a safeguard measure. Drawing on the comparative analysis conducted in the paper, the author offers a range of policies that could be deployed to make the United States investment rules more consistent with the rules of its peers and the economic realities of the 21st century.

Suggested Citation

  • Kevin P. Gallagher, 2010. "Policy Space to Prevent and Mitigate Financial Crises in Trade and Investment Agreements," G-24 Discussion Papers 58, United Nations Conference on Trade and Development.
  • Handle: RePEc:unc:g24pap:58
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    File URL: http://www.unctad.org/en/Docs/gdsmdpg2420101_en.pdf
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    References listed on IDEAS

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    1. Jörg Mayer, 2009. "Policy Space: What, for What, and Where?," Development Policy Review, Overseas Development Institute, vol. 27(4), pages 373-395, July.
    2. Laura Alfaro, 2004. "Capital Controls: a Political Economy Approach," Review of International Economics, Wiley Blackwell, vol. 12(4), pages 571-590, September.
    3. Nicolas Magud & Carmen M. Reinhart, 2007. "Capital Controls: An Evaluation," NBER Chapters,in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, pages 645-674 National Bureau of Economic Research, Inc.
    4. Ayhan Kose, M. & Prasad, Eswar S. & Taylor, Ashley D., 2011. "Thresholds in the process of international financial integration," Journal of International Money and Finance, Elsevier, vol. 30(1), pages 147-179, February.
    5. Alexei P Kireyev, 2002. "Liberalization of Trade in Financial Services and Financial Sector Stability (Analytical Approach)," IMF Working Papers 02/138, International Monetary Fund.
    6. Valckx, Nico, 2004. "WTO financial services commitments: Determinants and impact on financial stability," International Review of Financial Analysis, Elsevier, vol. 13(4), pages 517-541.
    7. Dani Rodrik & Arvind Subramanian, 2009. "Why Did Financial Globalization Disappoint?," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 112-138, April.
    8. Anne van Aaken & Jürgen Kurtz, 2009. "Prudence or Discrimination? Emergency Measures, the Global Financial Crisis and International Economic Law," Journal of International Economic Law, Oxford University Press, vol. 12(4), pages 859-894, December.
    9. Salacuse, Jeswald W., 2010. "The Law of Investment Treaties," OUP Catalogue, Oxford University Press, number 9780199206056.
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    Cited by:

    1. Alfredo C. Robles Jr, 2014. "EU Trade in Financial Services with ASEAN, Policy Coherence for Development and Financial Crisis," Journal of Common Market Studies, Wiley Blackwell, vol. 52(6), pages 1324-1341, November.
    2. José Manuel Álvarez Zárate (Editor), 2016. "¿ Hacia Donde Va América Latina Respecto Al Derecho Económico Internacional?," Books, Universidad Externado de Colombia, Facultad de Derecho, number 860.
    3. Ilene Grabel, 2013. "The Rebranding of Capital Controls in an Era of Productive Incoherence," Working Papers wp318, Political Economy Research Institute, University of Massachusetts at Amherst.

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