Information about Asia and the Pacific Asia y el Pacífico
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In the news: Sharper advice needed from IMF on capital account issues

International Monetary Fund. External Relations Dept.
Published Date:
June 2005
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Information about Asia and the Pacific Asia y el Pacífico
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Capital account liberalization has reemerged as a topic of intense debate in recent years. Some argue that rapid capital account liberalization caused much of the financial instability and economic distress that many emerging market countries experienced in the mid- and late 1990s. The IMF—which has always had a mandate to promote current account liberalization but no explicit mandate to promote capital account liberalization—has been part of the controversy, with some criticizing it for encouraging member countries to liberalize their capital accounts prematurely. On May 24, the IMF’s Independent Evaluation Office (IEO) released its report on the IMF’s approach to capital account liberalization. Shinji Takagi, IEO advisor and team leader for the report, spoke with Christine Ebrahim-zadeh of the IMF Survey about the report’s findings, which are based partly on the IMF’s experience in a sample of emerging market economies during 1990-2004.

IMF Survey: Although current account liberalization is among the IMF’s official purposes set out in its Articles of Agreement, the IMF has no explicit mandate to promote capital account liberalization. What have been the consequences of this lack of an explicit mandate—or even a formal IMF position—on capital account liberalization?

Takagi: Capital account liberalization is an important issue on which the IMF does not have a position. As a consequence, the IMF has not always provided consistent policy advice across countries. For example, the IMF encouraged Russia to open its government bond market to help the government finance its deficit through foreign borrowing. At the same time, it was telling India not to do so. The staff response to this finding of an apparent lack of consistency is that it reflects the adaptation of policy advice to specific individual country circumstances. We don’t deny that. In fact, we give credit to the staff for tailoring their advice. Still, without a formal IMF position, some sort of inconsistency is inevitable.

IMF Survey: There have been some initiatives to amend the IMF’s Articles of Agreement, but these have not been accepted. What is the reason behind the opposition?

Takagi: The evaluation did not address this issue but in my opinion, there are several reasons for the opposition. First, some developing countries do not want to be obligated, under the Articles of Agreement, to liberalize their capital accounts. Second, some feel that the IMF’s jurisdiction should remain with the making of payments and transfers for international transactions, not with the underlying transactions themselves. With capital account transactions, it is often not possible to make that distinction, and it is feared that giving the IMF jurisdiction over the capital account would end up granting it too much authority. Third, if there is a need for some official regulation of capital account transactions, some question whether the IMF is the right institution—and international civil servants are the right people—to have that responsibility. Fourth, some feel that without formal jurisdiction, the IMF has done quite well in adapting its procedures to deal with capital account liberalization and other capital account issues. Of course, our report challenges this last point. The lack of a formal IMF policy on capital account liberalization has led to some inconsistency in policy advice.

IMF Survey: The IMF got a reputation at the time of the Asian crisis for having been a cheerleader for capital account liberalization, and for not taking adequate account of the risks. How justified was this reputation?

Takagi: Our evaluation establishes that the IMF did not push these countries to liberalize their capital accounts. That the IMF was somehow responsible for encouraging East Asian countries to open their capital accounts and thereby invited subsequent crises is unfounded, although one can rightly question if the IMF did enough to warn them of the risks involved in the strategies for opening their capital accounts.

IMF Survey: What has the IMF’s stance been regarding the use of capital controls as a temporary measure to deal with large capital flows?

Takagi: The report documents that the IMF’s position on the temporary use of capital controls has not always been consistent. Because of the lack of an explicit policy position on capital account liberalization, the IMF really has depended on individual staff members’ views on the subject. That said, the institution’s stance has become very accommodating over time. Part of the explanation for this shift comes from empirical economic research—for example, on Chile’s and Malaysia’s use of these controls.

IMF Survey: What are the operational and procedural implications of the recommendations that come out of your review?

Takagi: There has to be greater clarity on the IMF’s policy on what the staff can do in terms of surveillance. The IMF is responsible for surveillance over members’ exchange rate policies. As part of this responsibility, it is already responsible for surveillance of their capital account policies. However, this is a derived responsibility. Without clear guidance, IMF staff are not entirely sure what they can and cannot do.

IMF staff support our first recommendation, which is to establish a formal IMF position on capital account issues. But the Executive Board could not reach consensus on that recommendation. Nevertheless, I believe the Board has realized that staff need some guidance in this area. If nothing else, the Board could at least agree to disagree—that is, it could state that there is no consensus in the Board and that the IMF has no official position on capital account liberalization. It could even say that staff may make their own decisions in their policy advice to countries.

Somewhat disappointing to me was the fact that so much of the Board discussion focused on our two broad recommendations. The IEO always has two purposes when it takes on a review. One is to increase transparency, and the other is to draw lessons for the IMF. In this case, we accomplished more on the first point because we documented and cleared up a number of misconceptions about the IMF’s role in capital account liberalization. The Board’s response, however, is understandable because the recommendations, and not the findings, are the ones that could potentially affect the institution.

Highlights of IEO report

Major findings

The IMF encouraged countries that wanted to move ahead with capital account liberalization, especially before the East Asian crisis. However, it did not push countries to move faster than they were willing to. While the IMF pointed out the risks inherent in an open capital account and the need for a sound financial system, these risks were insufficiently highlighted, until later in the 1990s.

In multilateral surveillance, the IMF emphasized the benefits to developing countries of greater access to international capital flows, while paying less attention to the risks inherent in their volatility. Its policy advice was directed more toward emerging market recipients of capital flows than to the question of how source countries might help reduce the volatility of capital flows on the supply side. In more recent years, IMF analysis of supply-side factors has intensified, but the focus remains on recipient countries.

In country work, IMF advice on capital account issues seems to have, at times, lacked consistency across countries. Policy advice must of necessity be tailored to country-specific circumstances, so uniformity cannot be the only criterion for judging the quality of IMF advice. Country documents, however, do not always provide sufficient basis for making a judgment on how the staff’s policy advice was linked to its assessment of the overall macroeconomic and institutional environments in which it was given.

The lack of a formal IMF position on capital account liberalization gave individual staff members freedom to use their own professional and intellectual judgment in dealing with specific country issues. In more recent years, the IMF’s approach to capital account issues has become somewhat more consistent and clear. But the new paradigm is still unofficial, and has not been formally adopted.


There is a need for more clarity in the IMF’s approach to capital account issues. Possible steps to improve the consistency could include:

  • clarification of the place of capital account issues in IMF surveillance.
  • sharpening of the IMF’s advice on capital account issues, based on solid analysis of the particular situation and risks facing specific countries.
  • clarification by the Executive Board of the common elements of agreement on capital account liberalization.

IMF analysis and surveillance should give greater attention to the supply-side determinants of international capital flows and what can be done to minimize their volatility. The IMF should also provide analysis of what can be done on the supply side to minimize the volatility of capital flows.

IMF Survey: The IMF has adopted a so-called “integrated” approach that makes capital account liberalization part of a comprehensive reform package, including the macroeco-nomic policy framework, domestic financial system, and prudential regulations. How easy is it to apply this approach, given that it seems to emphasize all potential interlinkages and does not seem to provide clear criteria for identifying a hierarchy of risks?

Takagi: In the past, the IMF followed an ad hoc, case-by-case approach. The integrated approach, which has emerged over the past five or six years, is a sort of informed consensus within the IMF. With this approach, the pendulum has swung to the other side. That is to say, if the IMF ever was pushing for capital account liberalization, it has now completely swung the other way. It is an approach that tries to ensure that every risk is covered. The IEO feels that not everything that this approach suggests is vital for capital account liberalization. A distinction needs to be made between what is absolutely necessary and what can wait. The IMF’s advice in this area has to be more practical by providing some indication of priorities.

IMF Survey: All the industrial countries have now had open capital accounts for at least a couple of decades, and these and other countries that have liberalized their capital accounts show no inclination to reverse the process. Doesn’t this suggest that this is essentially a one-way street—that more and more countries will open their capital accounts as time passes and that they will be happy with the results?

Takagi: I would say yes, although there may be some instances where countries will liberalize and then may wish to introduce safeguards by imposing temporary controls to deal with a specific problem. But with greater economic integration it is inevitable that capital controls will lose more and more of their effectiveness. This means that a policy of control will increasingly involve an administrative cost that is not justified by what it can achieve. As democratic values are more widely shared, pressure for capital account liberalization will come from another dimension. As political freedom increases, people will demand more economic freedom. Capital controls are not compatible with the desire of people to lend and borrow anywhere they want. But with this freedom will come more risk.

IMF staff responds

Staff largely concurs with the IEO’s findings on the IMF’s policy advice to its member countries on capital account issues. However, it feels that the report does not do justice to the role played by external forces in promoting capital account liberalization. Also, while staff considers the sample of country cases that formed a basis for the IEO’s evaluation to be a fair representation of the diverse membership, it believes that more attention could have been paid to differences among these countries. Relatedly, the finding of some apparent inconsistencies in the IMF’s advice on capital account liberalization across countries needs to be more nuanced.

With regard to the two main recommendations, staff notes that the IMF already is either implementing some of them in its work program or has plans to do so. Staff endorses the first recommendation—that the IMF clarify its approach, and sharpen its advice, on capital account issues. However, staff points out that the Board and the staff have increasingly made capital account developments and vulnerabilities an important focus of the IMF’s work on promoting stability, and that the process of clarifying the scope of IMF surveillance to include capital account issues is already under way. Staff agrees that it would be useful to have some clear operational guidance laying out the broad principles that it needs to follow in its policy advice across countries. There is, however, no single “right” approach.

Staff emphasizes that sharper advice from the IMF on capital account issues must be based on solid analysis of the particular situation and risks facing specific countries. However, the IEO’s suggestion that the IMF provide some quantitative gauge of the benefits, costs, and risks of liberalizing at different speeds is likely to prove difficult to put into practice, given the conflicting theoretical and empirical evidence on the subject and the political and economic complexities that capital account issues typically involve.

Staff agrees with the crux of the second recommendation—that the IMF’s analysis and surveillance should give greater attention to the supply-side factors of international capital flows and what can be done on the supply side to minimize the volatility of capital movements. However, given the large number of staff studies already completed (and more under way), staff is uncertain what other specific actions, if any, the IEO may have in mind. With so many initiatives under way, staff is puzzled by the report’s finding that the IMF pays too little attention to supply-side risks. Staff emphasizes that additional internationally coordinated efforts could help give supply-side issues higher priority among policymakers in advanced economies.

The full text of “IEO Report on the Evaluation of the IMF’s Approach to Capital Account Liberalization,” along with IMF management and staff responses and the summing up of the Executive Board’s discussion of the report, is available on the IEO’s website at

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