TWN Info Service on Finance and Development (Feb11/01)
7 February 2011
Third World Network

Leading economists urge US allow use of capital controls
Published in SUNS #7079 dated 2 February 2011

Geneva, 1 Feb (Kanaga Raja) -- More than 250 economists have recommended that as part of a broader menu of policy options to prevent and mitigate financial crises, future US trade and investment treaties should allow governments to deploy capital controls without being subject to investor claims.

In a letter delivered on 31 January to US Secretary of State Hillary Clinton, Treasury Secretary Timothy Geithner and US Trade Representative Ron Kirk, the economists expressed particular concern regarding the extent to which capital controls are restricted in US Free Trade Agreements (FTAs) and Bilateral Investment Treaties (BITs).

It called on the US to recognize that capital controls are legitimate prudential financial regulations that should not be subject to investor claims under US trade and investment treaties.

The economists' statement was initiated by Kevin Gallagher, Boston University professor and research associate at the Global Development and Environment Institute at Tufts University (GDAE), and Sarah Anderson, director of the Institute for Policy Studies Global Economy Project (IPS).

The initial signatories of the letter include amongst others Dani Rodrik, Rafiq Hariri Professor of International Political Economy, John F. Kennedy School of Government, Harvard University; Joseph Stiglitz, University Professor, Columbia University, Nobel laureate; Arvind Subramanian, Senior Fellow, Peterson Institute for International Economics, and Senior Fellow, Center for Global Development; Nancy Birdsall, President, Center for Global Development, Washington, DC; former IMF official, Olivier Jeanne, Professor of Economics, Johns Hopkins University, and Senior Fellow, Peterson Institute for International Economics; and Gerald Epstein, Department of Economics, University of Massachusetts-Amherst.

Other US-based economists in the list of signatories include Dean Baker, Co-director, Center for Economic and Policy Research; Aldo Caliari, Director, Rethinking Bretton Woods Project, Center of Concern; John Cavanagh, Director, Institute for Policy Studies; Jan Kregel, Senior Scholar and Program Director, Levy Economics Institute of Bard College; Thomas Palley, Associate, Economic Growth Program, New America Foundation; Mark Weisbrot, Co-Director, Center for Economic and Policy Research; Jane D'Arista, Research Associate, Political Economy Research Institute; and Timothy A. Wise, Director of Research and Policy Program, Global Development and Environment Institute (GDAE), Tufts University.

Further signatories include Patrick Bond, Professor of Development Studies, University of KwaZulu-Natal, Durban, South Africa; Ha-Joon Chang, Department of Economics, University of Cambridge, UK; Andrew Cornford, Counsellor, Observatoire de la Finance, Geneva, Switzerland; Gerry Helleiner, University of Toronto, Canada; Kavaljit Singh, Public Interest Research Centre, India; Robert H. Wade, Professor of Political Economy and Development, London School of Economics, UK; and Y Venugopal Reddy, Emeritus Professor, University of Hyderabad, Former Governor, Reserve Bank of India, India.

According to a news release of the GDAE and IPS, the statement reflects growing consensus among economists that capital controls, while no panacea, are legitimate policy tools for preventing and mitigating financial crises.

It notes that the US has trade or investment agreements with 52 countries that restrict the use of capital controls and allow private foreign investors the right to sue governments that violate these restrictions.

Several additional deals are in the works, says the release. It points for instance to the US-South Korea free trade agreement, which is pending Congressional approval; the Trans-Pacific Partnership Agreement, whereby negotiators from the US and eight other countries will be meeting for a fifth round of talks in February; and the investment treaty with China.

The release said that the US government is expected to complete soon a review of its model Bilateral Investment Treaty which will accelerate negotiations with China, India and several other countries.

In their letter to the senior US administration officials, the economists said that they wanted to alert the officials to important new developments in the economics literature pertaining to prudential financial regulations, and to express particular concern regarding the extent to which capital controls are restricted in US trade and investment treaties.

They said that authoritative research recently published by the National Bureau of Economic Research, the International Monetary Fund, and elsewhere has found that limits on the inflow of short-term capital into developing nations can stem the development of dangerous asset bubbles and currency appreciations and generally grant nations more autonomy in monetary policy-making.

"Given the severity of the global financial crisis and its aftermath, nations will need all the possible tools at their disposal to prevent and mitigate financial crises. While capital account regulations are no panacea, this new research points to an emerging consensus that capital management techniques should be included among the 'carefully designed macro-prudential measures' supported by G-20 leaders at the Seoul Summit," said the letter.

Indeed, noted the economists, in recent months, a number of countries, from Thailand to Brazil, have responded to surging hot money flows by adopting various forms of capital regulations.

"We also write to express our concern that many US free trade agreements and bilateral investment treaties contain provisions that strictly limit the ability of our trading partners to deploy capital controls. The 'capital transfers' provisions of such agreements require governments to permit all transfers relating to a covered investment to be made 'freely and without delay into and out of its territory'," the economists said.

Under these agreements, private foreign investors have the power to effectively sue governments in international tribunals over alleged violations of these provisions.

A few recent US trade agreements put some limits on the amount of damages foreign investors may receive as compensation for certain capital control measures and require an extended "cooling off" period before investors may file their claims, said the letter.

"However, these minor reforms do not go far enough to ensure that governments have the authority to use such legitimate policy tools. The trade and investment agreements of other major capital-exporting nations allow for more flexibility."

The economists recommended that future US FTAs and BITs permit governments to deploy capital controls without being subject to investor claims, as part of a broader menu of policy options to prevent and mitigate financial crises.

"It's in the US interest to allow other governments the authority to apply sensible capital controls," said Anderson of the Institute for Policy Studies. "In a globalized world, expanding the policy options to combat financial crisis makes sense for US businesses, workers and the environment."

"US trade treaties are inconsistent with the emerging consensus in the economics profession and among the international financial institutions that capital controls are a legitimate part of the toolkit," said Professor Gallagher of Boston University.

"The US and its trading partners should have all the possible tools available to prevent and mitigate future financial crises," he added. +