In the wake of the global financial crisis, developing countries have begun to re-regulate cross-border finance. At the same time, these nations are expressing concern that global economic governance institutions, including those dealing with international trade, have constrained the policy space that countries will need in order to deploy the proper regulations to mitigate the harmful effects of cross-border financial flows.
The workshop was organized jointly by UNCTAD and Boston University's Global Economic Governance Initiative, with support from the Ford Foundation. Its main goals were to understand better the nature of capital flows in developing countries since the Lehman Brothers crisis in 2008, what the experience of countries attempting to manage such flows has been, and the extent to which global economic governance institutions - such as the G20, the International Monetary Fund, the World Bank and the World Trade Organization - have facilitated such management.
The workshop started by assessing the rationale for capital account regulation, and different policy options for managing capital inflows. It then discussed countries' recent experiences with re-regulating capital flows, finding that controls are most effective when they are part of a permanent framework that is embedded with sufficient flexibility to target specific forms of flows and financial actors, and can be adjusted to operate in a countercyclical manner.
Discussing policy space, participants noted that, although developing countries are not constrained by multilateral rules to use capital controls, such restrictions can be found in the world of trade. Under the General Agreement on Trade in Services (GATS), countries may have the leeway to adopt capital controls by relying on untested exception clauses. The level of ambiguity in GATS rules leaves ample room for different interpretations, though weaker nations, lacking the resources and bargaining power to implement such controls or to avoid litigation, might find their use very arduous. It was observed that restrictions tend to be tougher under bilateral investment treaties (BITs) and free trade agreements (FTAs).
The workshop concluded with a series of policy recommendations to improve the management of capital flows at national and global levels:
Developing countries that still have relatively closed capital accounts should learn from other countries that liberalized "too fast, too far", and maintain a cautious approach towards the liberalization of their capital accounts. They should also be cautious in entering BITs and FTAs or making specific commitments at the GATS that may severely constrain their ability to re-regulate capital flows.
It was noted, however, that country-level action alone is not sufficient to address a problem that is global in nature. At the global level, there is a need for a reform of the entire international financial architecture - including the international reserve and exchange rate systems, regulation of systemically important institutions, temporary standstills, crisis lending, debt workouts, and more coordination on macroeconomic policy whereby both ends are targeted, with internationalization by developed countries of spillovers abroad.