International Herald Tribune
Paris, Friday, February 18, 2000
In Defense of Capital Controls
At Trade Conference, a Push to Curb Forces of Globalization
By Thomas Crampton International Herald Tribune
At the United Nations Conference on Trade and Development in Bangkok, Yilmaz Akyuz, the principal author of the conference's flagship annual report, argued that developing nations faced continuing perils from globalization. Mr. Akyuz, chief of macroeconomic and development policies for the conference, spoke Thursday with Thomas Crampton of the International Herald Tribune.
Q. Do you approve of capital controls to protect the economies of developing countries?
A. Yes. Unless you have checks and balances in the movement of capital you will be subject to the boom-bust phenomenon that is an integral part of the current international financial system. There are no global arrangements to control international movement of capital, so you must fall back on your national policies.
Q. What about those who argue that capital controls discourage foreign investment?
A. That is nonsense. If you look at new foreign direct investment, where do they go most? China. China receives the largest portion of new investment in the developing world and China has no capital account convertibility.
Q. Do capital controls hinder free trade?
A. You have to be careful because a lot of short-term capital flows are linked to trade, but on the other hand, the world has had free trade evolving since World War II under capital controls. A stable exchange rate and stable monetary conditions are important for the expansion of trade.
Q. What is the role of corruption in creating financial crises?
A. Cronyism, corruption and moral hazard were not major causes of Asia's recent economic crisis. Corruption and cronyism did not increase suddenly in the late 1990s to create the financial crisis. The institutions and relationships people blame are not new, what is new is the opening of financial flows. The same close government and business relations that were praised for creating the Asian miracle, have now been turned upside down and receive all the blame.
Q. How do you view the recovery in many developing economies?
A. The markets went down much too far due to the incorrect orthodox policies put in place by multilateral financial institutions. When these policies were reversed, the economies bounced back. That fiscal deficits and exports are driving the economies - not investment or consumer spending - backs up our view that the high interest rates and austerity measures were incorrect. There is, however, still excess capacity in these economies and it remains to be seen how it will be dealt with.
Q. What is the greatest danger now for developing economies?
A. If the U.S. economy slows down and a significant economic expansion does not take place in Japan and Europe, developing nations will face very difficult time.
Q. Any sign that America has developed a higher sensitivity to the delicate global economic situation?
A. Alan Greenspan made a very positive response by cutting interest rates after the Russian crisis. There were real dangers to the U.S. economy, but it is the first and perhaps the only time that U.S. monetary policy action was taken with global considerations. I do not see this as a trend. As soon as Wall Street went up, Greenspan returned to setting monetary policy on the basis of domestic considerations alone.
Q. What in this Unctad conference compared with the last one?
A. It has become clear that globalization is a process guided by the powerful few which has created inherent asymmetries that are hurting developing countries. The main message coming out is that globalization is not delivering and there is a danger of backlash against freer trade.
Q. Are you against globalization?
A. I am not against the greater economic integration of countries. What I am against is the process being swayed by the powerful players or unbridled market forces. It is not now governed by equity and fairness.
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