Capital account regulations and global economic governance

14 November 2013

UNCTAD's latest Policy Brief looks at how emerging economies have managed capital inflows in the post-crisis period and makes policy recommendations on trade rules and capital account regulation.

Since the global financial crisis, a consensus has emerged around the need to regulate capital flows in order to reduce the chances of future crises and to mitigate their damage if they do occur.

Many emerging economies have already introduced measures to reregulate cross-border finance.

However, these economies are concerned that some of the global and regional agreements they have negotiated over the last two decades may unduly constrain their room to deploy effective measures.

There is thus a need for more policy space so that developing countries can adopt effective capital account regulation (CAR) to deal with both excessive capital inflows and sudden outflows.

At the global level, there is a need for comprehensive reform of the entire financial architecture and more coordination on macroeconomic policy whereby both source and recipient countries are targeted.

Key points:

  • A number of developing countries have reregulated cross-border finance in the post-crisis period, but global and regional agreements may constrain room to deploy effective tools.

  • The recent record in managing capital flows has been mixed due to, among other things, adoption of ad hoc measures, with walls that are neither high nor wide enough to mitigate threats.

  • Capital controls are most effective when permanent and adjustable in order to operate in a countercyclical manner.

  • There is a need for comprehensive reform of the international financial architecture and more macroeconomic policy coordination to target source countries.