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Economists Unite Around Capital Controls

by Leroy Baker,, New York

02 February 2011

The Institute for Policy Studies (IPS) and Tufts University in Massachusetts have coordinated a letter from a group of more than 250 United States and international economists to the government, urging it to change course and allow other governments to use capital controls, particularly within the free trade agreements (FTAs) it negotiates.

The letter, written to the US Secretary of State Hillary Clinton, Treasury Secretary Timothy Geithner and Ron Kirk, the United States Trade Representative, disclosed that “authoritative research recently published by the National Bureau of Economic Research, the International Monetary Fund (IMF), 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.”

The economists considered that governments will need all possible tools following the economic and financial crisis, and that “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.” They pointed out that, 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.

The letter went on to express the economists’ “concern that many US FTAs and bilateral investment treaties contain provisions that strictly limit the ability of our trading partners to deploy capital controls.” It refered to 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 those agreements, the letter said, private foreign investors have the power to effectively sue governments in international tribunals over alleged violations of those provisions.

“A few recent US 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,” it continued. “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.”

The economists therefore recommended that future US FTAs and investment treaties permit other foreign governments “to deploy capital controls without being subject to investor claims, as part of a broader menu of policy options to prevent and mitigate financial crises.”

IPS Global Economy Project Director Sarah Anderson has written that, until recently, the IMF and the US government “led a crusade to eliminate capital controls, which include taxes and other measures to manage cross-border ‘hot money’ flows. Then, after several countries used capital controls effectively to insulate themselves from the ravages of the 1990s financial crises, the IMF's opposition began to soften.”

“Since the 2008 financial meltdown,” she added, “the IMF has actually recommended such controls in certain circumstances. The US government, meanwhile, has carried on the old crusade and now has trade or investment agreements with 52 nations that prohibit capital controls.”

She concluded that “the Obama administration has ample opportunities to bring a fresh approach to ongoing negotiations in its efforts to conclude pending FTAs with Colombia, Korea, and Panama; its review of the US model bilateral investment treaty, which will be the basis for new deals with India, China, and several other countries; and its talks over the Trans-Pacific Partnership with eight other nations.”

TAGS: tax | investment | free trade agreement (FTA) | law | trade treaty | investment treaty | agreements | United States | regulation | trade

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