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By Lee Hyo-sik
Staff Reporter
The International Monetary Fund (IMF) has become more lenient toward capital control which could change the landscape of the entire global financial system.
The shift in the IMF's attitude is likely to affect the course of Korea's international finance policies.
However, Seoul policymakers are split over how to control speculative "hot money."
A group of IMF economists, including Jonathan D. Ostry, published a report in February, saying it may be appropriate for emerging economies to control cross-border capital movements on conditions under which controls are justified.
The Washington-based organization had been a strong advocate over the years for the free flow of capital across the globe, opposing any measures by its members aimed at reining in capital flow worldwide.
"If the economy is operating near potential, if the level of reserves is adequate, if the exchange rate is not undervalued and if the flows are likely to be transitory, then use of capital controls - in addition to both prudential and macroeconomic policy - is justified as part of the policy toolkit to manage inflows," the IMF paper said.
It said such controls can retain potency even if investors devise strategies to bypass them, provided such strategies are more costly than the expected return from the transaction.
"Controls seem to be quite effective in countries that maintain extensive systems of restrictions on most categories of flow. For example, in the case of Chile and Colombia, controls do appear to have had some success in tilting the composition of inflow toward less vulnerable liability structures," it added.
Dani Rodrik, a Harvard University professor, argued that the IMF paper is an indication of a change to its long-held position on capital controls, calling it the end of an era in global finance.
"As late as November last year, IMF Managing Director Dominique Strauss-Kahn had thrown cold water on Brazil's efforts to stem inflows of speculative hot money and said that he would not recommend such controls as a standard prescription. But the paper says otherwise, stressing taxes and other restrictions on capital inflows can be helpful and they constitute a legitimate part of policymakers' toolkits," Rodrik told The Korea Times in his contribution.
He also said the IMF's policy note makes clear that controls on cross-border financial flows can be not only desirable, but also effective. "Capital controls are to prevent inflows of hot money from boosting the value of the home currency excessively, thereby undermining competitiveness.
"Another justification is to reduce vulnerability to sudden changes in financial-market sentiment, which can wreak havoc with domestic growth and employment."
Regarding the IMF's move, Korean policymakers have been giving mixed views. The Ministry of Strategy and Finance, said it will do more harm than good to the Korean economy.
But the Financial Services Commission (FSC), the nation's domestic financial policymaking body, has shown some interests in restricting capital flow in and out of Asia's fourth-largest economy.
"I do not think the Feb. 19 paper conveys the IMF's official position on capital controls. But it shows that the organization has become more lenient toward the issue. The Korean government will not introduce any steps that could curb capital movement in and out of the country," said Kim Ik-joo, director general of the finance ministry's international finance bureau.
In a meeting with foreign correspondents on March 8 in Seoul, Strategy and Finance Minister Yoon Jeung-hyun also said Korea will maintain an "openness and competition" principle in dealing with cross-border capital flows and has no plan to impose any controls.
However, FSC Chairman Chin Dong-soo said a Tobin tax on international financial transactions can help regulate the movement of hot money in and out of Korea if adopted worldwide.
The IMF research paper came as many emerging economies have increasingly suffered from movements of cross-border speculative funds, or "hot money," and the IMF has been looking into the issue.
China and other developing countries have seen a steep inflow of capital, bringing about a range of negative consequences to their economies. They are grappling with surging value of real estate properties and currencies, among other side effects.
In response, Brazil has imposed a Tobin tax on short-term cross-border capital transactions to stem inflow of hot money, with emerging economies moving to follow suit.
Chin said if an agreement is made, it will effectively reduce the flow of excessive cross-border liquidity, stressing that the biggest risk to the Korean economy has been the sudden international flow of capital.
leehs@koreatimes.co.kr
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