Regaining Control? Capital Controls and the Global Financial Crisis
Regaining Control? Capital Controls and the Global Financial Crisis
Abstract and Keywords
The Global Financial Crisis has triggered a transformation in thinking and practice regarding the role of government in managing international capital flows. This chapter traces and evaluates the reemergence of capital controls as legitimate tools to promote financial stability. Whereas capital controls were seen as orthodox in the neoliberal era that began in the late 1970s, there is now an emerging consensus that capital controls can play a legitimate role in promoting financial stability. From 2009 to early 2011, a number of developing nations resorted to capital controls to halt the appreciation of their currencies, and to pursue independent monetary policies to cool asset bubbles and inflation. This chapter evaluates he effectiveness of these controls is conducted for the cases of Brazil, South Korea, and Taiwan. This analysis suggests that Brazil and Taiwan have been relatively successful in deploying controls, though South Korea’s success has been more modest. The fact that capital controls continue to yield positive results is truly remarkable given the fact that there has been little (or contrary) support for global coordination, and that many nations lack the necessary institutions for effective policies. The chapter concludes by pointing to the need for more concerted global and national efforts to manage global capital flows for stability and growth.
A key characteristic of the Global Financial Crisis (GFC) has been the mass swings of capital flows across the globe. Indeed, international investment positions now surpass global output. Developing and emerging markets were no strangers to these flows. When the crisis hit, capital rapidly left the developing world in a flight to the “safety” of the US market. In the attempt to recover, many industrialized nations, including the United States, have resorted to loose monetary policy with characteristically low interest rates. Relatively higher interest rates and a stronger recovery have triggered yet another surge in capital flows to the developing world. The result has been an increasing concern over currency appreciation, asset bubbles, and even inflation.
In a marked difference from previous crises, to tame excessive capital flows, many emerging markets have deployed capital controls. To John Maynard Keynes, Harry Dexter White, and the other architects of the Bretton Woods system, capital controls were seen as an essential feature of a well-functioning global financial system. Beginning in the 1980s, however, capital controls became shunned by the International Financial Institutions (IFIs), the private sector, and many Western governments. During the GFC, capital controls have regained their legitimacy in academic circles and in actual policy.
This chapter will examine the role that capital flows have played in the GFC, trace the political economy of capital controls from the Bretton Woods era to their resurgence during the financial crisis, and conduct a preliminary analysis to evaluate the effectiveness of the controls thus far deployed. Finally, the (p.110) chapter will sketch the challenges of managing global capital flows in the twenty-first century.
Beyond this short introduction, this chapter has four additional parts. The second part (“Great (and Not So Great) Transformations”) of the chapter traces the rise, fall, and resurgence in thinking about capital controls since Bretton Woods. Part three (“Capital Flows, Capital Controls, and the Global Financial Crisis”) outlines the specific use of capital controls by various governments during the GFC. In part four (“Just One Rock in a Swiftly Flowing Stream? A Preliminary Analysis”) is a preliminary analysis of the effectiveness of those controls. Part five (“Twenty-First-Century Challenges”) examines the challenges in terms of designing effective capital controls at the national and global level.
Great (and Not So Great) Transformations
During the Bretton Woods process that established a fixed but adjustable pegged exchange rate system, the International Monetary Fund (IMF), and the World Bank, Britain’s chief negotiator John Maynard Keynes and his US counterpart Harry Dexter White both agreed that a distinction should be made between “speculative” capital and “productive” capital, and that speculative “hot money” capital was to be scrutinized (Abdelal, 2007). Indeed, at those meetings, Keynes argued that, “control of capital movements, both inward and outward, should be a permanent feature of the post-war system” (quoted from Helleiner, 1994: 33). Capital controls (on capital account transactions) were made fully permissible under the Articles of the IMF and remain so, despite efforts to the contrary, to this day. As Keynes said, “What used to be a heresy is now endorsed as orthodoxy” (Helleiner, 1994: 25).
From the late 1970s until the GFC, thinking about capital controls was drastically revised, with neoliberal ideas about politics and economic organization dominating thinking about capital movements. In the wake of the GFC, there are a variety of perspectives on capital controls. This section of the chapter traces these swings in thinking and practice over the last seventy years. The parts that follow are organized around Figure 7.1.
Previous to the construction of the Bretton Woods system, the world economy was hinged by the gold-exchange standard. All that changed with the establishment of Bretton Woods, formalized immediately after World War II. Barry Eichengreen describes three significant changes in global monetary policy from Bretton Woods: pegged exchange rates became adjustable, capital controls were permitted to limit capital flows, and the IMF was established to (p.111) monitor the global economy and provide balance of payments financing for countries in need (Eichengreen, 2007).
Eric Helleiner convincingly argues that this decisive change was due to four political–economic factors. These are depicted in the first column of Figure 7.1 under “Bretton Woods.” First, the construction of the Bretton Woods system reflected the prevailing mode of thought (at least in the United Kingdom and the United States where the institutions were framed) of “embedded liberalism”—the dominant thinking about political and economic organization at the time that stressed that markets were imperative but they needed to be “embedded” in proper institutions for them to be welfare enhancing. “Embedded liberals argued that capital controls were necessary to prevent the policy autonomy of the new and interventionist welfare state from being undermined by speculative and disequilibrating international capital flows” (Helleiner, 1994: 4). Helleiner stressed that this thinking was backed by a coalition of Keynesian-minded policymakers, industrialists who gained from such policy, and labor leaders. In more recent work, Helleiner stresses how Harry Dexter White and John Maynard Keynes wanted to formalize this way of thinking about states and markets in the Bretton Woods agreements. Indeed, they “saw the goal of bringing international finance under greater public control as a central objective of their blueprints” (Helleiner, 2011: 2).
Second, by the time of the Bretton Woods era, the “Keynesian Revolution” was in full swing, with the US and UK governments both seeking a version of Keynes’s ideas at the actual Bretton Woods conference and in economic policymaking in general (Skidelsky, 2000).
Third, Helleiner argues that the United States remained permissive regarding capital controls, leaving policy space for nations to deploy them. The United States at the time endorsed an embedded liberal framework, and economists in the country also had concerns about the impossible trinity. Perhaps more importantly, however, the United States permitted capital (p.112) controls in other nations because of Cold War concerns. Policymakers in Japan and Europe saw controls as essential to their growth strategies and the United States saw enabling growth and maintaining alliances with those nations as a high priority.
Finally, according to Helleiner, was the specter of 1945–7 when the United States pushed hard for capital account liberalization. This in part was seen as leading to the 1947 economic crisis in Europe. Immediately after Bretton Woods went into force, the Roosevelt Administration was replaced by Truman’s and led to some significant changes in policy. Truman brought in members of the New York banking sector who sought to gain more access in Europe and elsewhere for capital flows. The backfire put the United States back on a course that was more accepting of controls until the 1970s.
A number of criticisms have been levied toward the Bretton Woods system. However, for at least two decades after the agreements were signed, the system worked fairly well—though in large part because they were embedded in a broader institutional framework. To quote Eichengreen:
Capital controls were the one element that functioned more or less as planned. Observers today, their impressions colored by the highly articulated financial markets of the late-twentieth century, are skeptical of the enforcement of such measures. But circumstances were different in the quarter-century after World War II. This was a period when governments intervened extensively in their economies and financial systems. Interest rates were capped. The assets in which banks could invest were restricted. Governments regulated financial markets to channel credit toward strategic sectors. The need to obtain import licenses complicated efforts to channel capital transactions through the current account. Controls head back the flood because they were not just one rock in a swiftly flowing stream. They were part of the series of levees and locks with which the raging rapids were tamed. (Eichengreen, 2007: 92)
In later years, it would come as a shock that an international agreement, let alone the articles establishing the IMF, unambiguously sanctioned capital controls. The coalition described by Eichengreen and others, along with its insistence on capital controls as an essential part of the global financial system, began to deteriorate in the 1970s.
The Neoliberal Era
Enter the neoliberal era, rising with the arrival of Ronald Reagan and Margaret Thatcher in 1979–80 and cresting with the “Washington Consensus” advocated by the United States, Europe, and the IFIs throughout the 1990s. In general, this era could be characterized as seeing an extremely limited role for the state in economic affairs, and the principal role of politics was to carry out (p.113) that economic view. Corresponding with Figure 7.1, this period is characterized as a shift from embedded liberalism to neoliberal thought in general, and the dominance of a particular brand of neoclassical economics that supported a very limited role of the state in economic affairs in particular. In addition, whereas the United States and the IMF had seen it as advantageous to support capital controls in the earlier era, with the Cold War no longer driving US financial strategy, the United States was now gaining a comparative advantage in global financial services and saw capital account liberalization as advantageous to key constituencies in the United States. The very lucrative Euromarket, in hindsight, had served as a pilot project to show just how beneficial open capital markets could be for US financial services industries.
Perhaps Mark Blyth’s analysis of the rise of neoliberalism is most lucent. Blyth’s book, Great Transformations: Economic Ideas and Institutional Change in the Twentieth Century (2002), traces the shift from embedded liberalism to neoliberalism in the 1970s. He writes:
In sum, just as labor and the state reacted to the collapse of the classical liberal order during the 1930s and 1940s by re-embedding the market, so business reacted against this embedded liberal order during the 1970s and 1980s and sought to “disembed liberalism” once again. In this effort, business and its political allies were quite successful, and by the 1990s a new neoliberal institutional order had been established in many advanced capitalist states with remarkable similarities to the regime discredited in the 1930s. (Blyth, 2002: 6)
What makes Blyth’s analysis so insightful is that he shows how such a key role was played by the political uses of economic ideas by organized business. In significant detail, Blyth shows how the US business community, which in many ways earned its wings under the embedded liberal era, now sought to fly away from regulation, and from the United States. In addition to setting up offices in Washington DC and creating political action committees, Blyth traces how business funded think tanks to promote the neoliberal ideas. Together these efforts managed to almost completely erode the compact Helleiner discusses as uniting US economic politics and the international institutions that the United States helped form.
During this period came a rise in neoclassical economics in general and monetarist macroeconomic thinking in particular. Milton Friedman’s rival (to Keynesian) explanation of the causes of financial crises gave rise to a host of theoretical developments and corresponding policy recommendations that fed perfectly into the new regime described by Blyth. One such case was developments in neoclassical economic theory that saw capital account liberalization as beneficial. Drawing on the “law of variable proportions,” advocates for capital market liberalization argued that, by liberalizing the flows of international capital, developing countries would benefit by getting access to (p.114) cheaper credit and investment from developed markets, promoting growth and stability. Because poorer nations have less capital per worker, the law of variable proportions states that the real return on capital would be higher in the industrialized countries where capital is relatively more scarce. This new capital would deepen credit markets, diversify availability of credit (and thus reduce risk), and so forth. Indeed, conventional theory implied that investment tends to flow to developing countries, where the marginal returns may be higher (Barro, 1997).
US strategy changed as well. Whereas the Cold War drove US financial interests in this regard in the aftermath of the Bretton Woods agreements, the 1980s saw the emergence of US financial services firms as major global players. The United States, or New York in particular, was determined to become the world’s global financial capital. Cohen (2007) attributes the US’s stance as a combination of ideology and domestic politics. Regardless of the party in power in the United States, Treasury officials and Presidential advisors largely held neoliberal training and beliefs beginning in the 1980s. Perhaps more importantly, Cohen illustrates that while the costs of capital controls are directly felt by a handful of politically organized US constituents—Wall Street—the beneficiaries are diffuse and do not feel the direct effects. Thus, a collective action problem persisted where Wall Street organizes around capital account liberalization. Voices as diverse as Robert Wade (1998) and Jagdish Bhagwati (1998) went on to coin the term a “Wall Street-Treasury complex” (analogous to the “military industrial complex” coined during the Eisenhower era to describe politics of that time). These authors argued that the US Treasury and Wall Street investment houses pushed for the freedom of capital movements wherever possible, including forcing the IMF into pushing capital account liberalization worldwide and working to mint such a policy in the IMF articles.
It is true that the United States and the IMF were staunch advocates of capital account liberalization during this period. In the case of the IMF, however, some authors argued that IMF behavior was driven by more than just US pressure and veto power. Abdelal (2007) argues that this change was imported to the IMF from the French. French socialists were originally big advocates of capital controls. However, controls on outflows in 1983 adversely affected the middle class and led to a change in the party stance. When Michel Camdessus (a prominent French Socialist at the time) became IMF Managing Director, he began changing the culture at the IMF toward the liberalization of capital controls.
Chwieroth (2010) acknowledges that the French connection was important, but stresses how the agents—the IMF staff—were the key advocates that had the most influence on the change. In its early days, most IMF staff were Keynesians who supported capital controls, but slowly the IMF became populated with US-trained neoclassical economists who believed capital controls to be counterproductive. Chwieroth finds, however, that there were tensions (p.115) between “gradualist” and “big-bang” camps at the Fund. Gradualists advocated for gradual capital account liberalization and the selective use of capital controls, and big-bang advocates wanted rapid liberalization of the capital account. The IMF is largely seen as a big-bang advocate, especially to casual observers who saw the IMF looking to change its charter to mandate capital account liberalization and those who observed IMF country programs where capital controls often had to be eliminated on condition of an IMF loan. Chwieroth shows that this was not necessarily the case. Gradualists and big-bang advocates at the IMF struck a compromise on capital controls. By the end of the 1990s, the IMF was pushing for capital account liberalization but tacitly supporting limited and temporary controls as safeguard measures in crisis mitigation on the road to liberalization.
If the example of the adverse affects of attempted capital account liberalization between 1945–7 was the reason why the United States and IFIs backed off from prohibiting capital controls during the Bretton Woods era, the lucrativeness of the Euromarket in the 1970s was a pilot project pointing to the need to accelerate financial globalization—from a US standpoint at least. In part to circumvent US controls on outflows in the 1960s, US banks fled to the Eurodollar market—the “offshore” market where US dollars can be used to invest in Europe. New York banking firms lobbied hard to ensure that foreign currency loans of foreign branches of US banks were exempt from the capital controls, as were offshore dollar loans (Helleiner, 1994). The entry into the Eurodollar market by US banks and multinational corporations not only became lucrative for individual firms but also “Transformed the Eurodollar market from a short-term money market into a full-fledged international capital market” (Helleiner, 1994: 89). US firms saw this example as something that should be imported home to secure the US as a capital for global finance.
Global Financial Crisis
It is clearly too early to provide a full characterization of thinking about capital controls during the wake of the financial crisis, as it is still in flux. This section therefore discusses what the present is not relative to the previous two periods rather that what is. It is true that the ideas surrounding neoliberal political economic organization and neoclassical interpretations of capital flows have come under great scrutiny given the central role that both played in the crisis. However, the political forces that played such a strong role in transforming thinking about capital controls during the neoliberal era are still intact and regaining political and economic strength. Nevertheless, numerous countries have deployed capital controls in the run-up to and in the wake of the crisis, including Brazil, Colombia, Indonesia, South Korea, Taiwan, Thailand, and (p.116) others. Moreover, the G20 and IMF have proposed creating a new global regime to regulate capital flows.
Corresponding to Figure 7.1, this section of the chapter argues that there are now a variety of liberalisms that have political weight in the global economy; that there is new thinking in economics regarding capital controls, not the least of which is empirical evidence from neoclassical economists themselves on the efficacy of controls; that the United States has softened its stance on capital controls and has less standing on the issue than before; and of course that the GFC, and the Asian crisis before it, looms large in terms of capital flows.
First, there are now a variety of models of liberalism that have gained dominance and that may pose an alternative to the US brand of neoliberalism. The most obvious examples are China, along with India and Brazil. These three emerging markets have had remarkably strong economic growth rates for a decade and after a temporary shock have been able to recover from the crisis more robustly, at least for now. These countries, to varying degrees, could be classified as “neo-developmental states.” The developmental state is the variant of embedded liberalism for developing countries, whereby developing country states embedded markets in a national drive toward industrialization and higher standards of living (Woo-Cummings, 1999). All three of these nations have been reluctant to liberalize their capital accounts and frequently (or permanently in China’s case) deploy capital controls. These nations are now key parts of the G20, have more voting rights at the IMF, and so forth. They thus present a variant of liberalism that is somewhat balancing the view of capital account regulation and capital flows in the development process.
In economics, there has been less of a pluralization in thinking than there has been the need to confront the overwhelming evidence presented by neoclassical economists themselves on capital account liberalization and capital controls. The East Asian financial crisis and the economics literature put an end to discussions on changing the IMF’s articles of agreement to include capital account liberalization. The Asian crisis was seen by many to be in large part due to too rapid a liberalization of Asian capital accounts. Moreover, open capital accounts allowed the crisis to spread deeper and wider. At the same time, numerous economic studies including the IMF’s own World Economic Outlook began to show that capital account liberalization was not associated with economic growth (Eichengreen, 2004; IMF, 2005; Ocampo et al., 2008).
There is a near consensus among empirical neoclassical macroeconomists that capital market liberalization in developing countries is not associated with economic growth (Prasad et al., 2003). Indeed, the most recent research has shown that capital market liberalization is only associated with growth in nations that have reached a certain institutional threshold—a threshold that most developing nations are yet to achieve (Kose et al., 2009). This is partly due to the fact that the binding constraint for some developing country (p.117) growth trajectories is not the need for external investment, but the lack of investment demand. This constraint can be accentuated through foreign capital flows because such flows appreciate the real exchange rate, thus reducing the competitiveness of real economy goods and reducing private sector willingness to invest (Rodrik and Subramanian, 2009).
Capital controls have been found to stabilize short-term volatile capital flows; can give policymakers additional policy instruments that allow them more effective and less costly macroeconomic stabilization measures; can promote growth and increase economic efficiency by reducing the volatility of financing and of real macroeconomic performance; and can discourage long-term capital outflows (Ostry et al., 2010). The literature on capital controls generally discusses at least six core reasons why nations may want to deploy them (Magud and Reinhart, 2006). To summarize, say Magud and Reinhart, “in sum, capital controls on inflows seem to make monetary policy more independent, alter the composition of capital flows and reduce real exchange rate pressures.” In terms of outflows, say Magud and Reinhart, it is clear that such provisions were successful in Malaysia, but it is not so clear about the case of other nations.
In a February 2010 Staff Position Note, the IMF staff reviewed all the evidence on capital controls on inflows, pre- and postcrisis, and concluded: “capital controls—in addition to both prudential and macroeconomic policy—are justified as part of the policy toolkit to manage inflows. Such controls, moreover, can retain potency even if investors devise strategies to bypass them, provided such strategies are more costly than the expected return from the transaction: the cost of circumvention strategies acts as ‘sand in the wheels’ ”(Ostry et al., 2010). To come to this conclusion, this recent and landmark IMF study reviews the experiences of post-Asian crisis capital controls. The IMF also conducted its own cross-country analysis in this study, which also has profound findings. The econometric analysis conducted by the IMF examined how countries that used capital controls fared versus countries that did not use them in the run-up to the current crisis. They found that countries with controls fared better: “the use of capital controls was associated with avoiding some of the worst growth outcomes associated with financial fragility” during the GFC (Ostry et al., 2010: 19).
The IMF’s stance on capital controls has gone beyond research. In addition to the staff position note, the IMF has reiterated its support for the careful use of capital controls in its Global Financial Stability Report and in its flagship World Economic Outlook. In the wake of the crisis, the IMF has recommended that nations such as Brazil, Colombia, and India deploy capital controls. Such advice has also been put forth by the Asian Development Bank (ADB), the United Nations, and even by the World Bank (Grabel, 2010).
Advice has not been limited to inflows controls. There has even been some attention by prominent economists on the need for restrictions on outflows. And the IMF began to endorse controls on outflows in its country programs. (p.118) Calvo (2009) argues that capital controls could be deployed to dampen the impact of capital flight during crises. Even in “normal” times, however, Calvo argues that prudential regulations should sometimes be coupled with foreign exchange restrictions to reduce capital flight. Indeed, during the GFC, the IMF actually recommended or at least sanctioned controls on outflows in Iceland, Latvia, and the Ukraine (IMF, 2009; Grabel, 2010).
What explains this shift in thinking, especially at the IMF? Part of the answer lies in the emerging plurality of the global system. As noted earlier, China, India, Brazil, and other nations are now part of the G20 (which has played the key role in the crisis rather than the G-7), have more voting power at the IMF and World Bank, and generally more sway given their market power and dynamism. Many of these nations deploy controls and see them as part of preserving autonomy for domestic objectives.
Another factor is the IMF leadership. Dominique Strauss-Kahn has been angling to reshape the tattered image of the IMF, which had been significantly stigmatized after the Asian financial crisis. Many developing nations accumulated reserves, deployed capital controls, and set up regional financial arrangements in order to avoid the IMF in times of crisis. Projecting a “kinder,” IMF has been part of Strauss-Kahn’s objective—which has become all the more important as he pursues the French Presidency. Many emerging markets were deploying controls; the IMF was not about to pick a fight (Grabel, 2010).
Inside the IMF, the staff continued to labor at rigorous econometric analyses of the impacts of capital controls. Following the Asian crisis, economists such as Kenneth Rogoff (Harvard) and Carmen Reinhardt (Maryland) formed the top leadership of the IMF’s research department. Both these economists have done enormous research on financial crises and have shown how capital flows can be disequilibrating. Reinhardt (along with Magud who also went to the IMF) was the author of a definitive National Bureau of Economic Research survey of the most rigorous studies on capital controls. The staff not only produced a sheer mountain of evidence but such research was legitimized because it was overseen by some of the most well-known and highly regarded academic economists as well.
The United States has been ambivalent on one level, and quietly against controls on another. The United States saw to it that early G20 communiqués called for nations to allow capital to continue to flow freely across borders. However, at the 2011 G20 summit in Seoul, the United States endorsed a communiqué where, while not mentioning capital controls explicitly, G20 leaders called on the IMF and others “to do further work on macro-prudential policy frameworks, including tools to mitigate the impact of excessive capital flows” (G20, 2010). US Treasury Secretary Timothy Geithner also endorsed Brazil’s capital controls in a February 2011 speech there (Winter, 2011). In conversation with senior officials at the US Treasury Department in preparation (p.119) for this chapter, the US “lenience” on this issue at the G20 marks a shift from the Bush administration and shows that “the door is ajar on capital controls.” That said, among the chief objectives of the Treasury Department is global rebalancing. Thus, the United States, if it ever were to explicitly acknowledge the usefulness of capital controls, would not treat them equally. To the United States, nations such as China have undervalued currencies that have contributed to global imbalances. Capital controls to tame currencies in those nations would thus garner less support than say nations like Thailand that have been attempting to stem asset bubbles (DOT, 2011). In February of 2011, the US Treasury Secretary was said to have tacitly endorsed Brazil’s capital controls when he said that countries such as Brazil “may need to adopt carefully designed macroprudential measures to stem inflows” (Winter, 2011).
While the door for capital controls may be ajar in terms of global economic governance, it remains shut with respect to US trade and investment treaties. Whereas US trade treaties granted nations (like Mexico under NAFTA) safeguards to use controls to prevent balance of payments problems, treaties under the administration of George Bush eliminated such safeguards. Capital controls and trade treaties became a highly controversial issue in negotiations with Chile and Singapore in the early 2000s. Chile has been well known for its unremunerated reserve requirement, whereby a certain percentage of capital inflows need to be deposited in the Central Bank for a minimum period of time. This measure has been econometrically shown to have buffered Chile from the acute crises that struck the region in the 1990s. Singapore saw that Malaysia successfully deployed controls on outflows in the wake of the Asian financial crisis and wanted to reserve that option. The United States adamantly opposed such proposals and both treaties left capital controls actionable—though investors have to wait one year before suing for damages. The Bush Administration negotiated similar deals with Peru, Panama, South Korea, and Colombia. The Obama Administration has not gone back to the more permissive NAFTA model but ironically is working hard to pass the Bush era deals. In response to a letter where more than 250 economists urged the Obama Administration to provide flexibility for controls in US trade deals, the United States replied that they did not intend to change treaties to that effect (Drajem, 2011). The GFC, with its origins in the United States, has changed the thinking and practice of many a nation and the IMF, but is yet to fully hit home on this matter (Gallagher, 2011).
Capital Flows, Capital Controls, and the Global Financial Crisis
This section of the chapter shows how the GFC has been characterized by enormous swings in global capital flows and how some nations have (p.120) attempted to stem such flows with capital controls. First is a discussion of the role of capital flows in the crisis. Second is a short discussion of the types of capital controls that have generally been deployed by nations over the past fifteen years. Finally, a discussion of the capital controls used by various emerging market nations since 2009 is presented.
Capital Flows During the Global Financial Crisis
Capital flows, defined as non-foreign direct investment flows, were pro-cyclical during the GFC. There was too much capital during the boom(s) and too little during the busts. Between 2002 and 2007, there were massive flows of capital into emerging markets and other developing economies. After the collapse of Lehman Brothers, there was capital flight to the “safety” of the US market, wreaking havoc in emerging markets. As interest rates were lowered for expansionary purposes in the industrialized world between 2008 and 2011, capital again began to expand into emerging markets where interest rates and growth were relatively higher. The carry trade was a key mechanism that triggered these flows. Increased liquidity induced investors to go short on the dollar and long on currencies in nations with higher interest rates. With significant leverage factors, investors gained on both the interest rate differential and the exchange rate movements.
Source: IMF World Economic Outlook, October 2010 (Asia includes: South Korea, Malaysia, Philippines, Singapore, Taiwan, and Thailand).
Figure 7.2 shows non-FDI capital flowing to Asia beginning with the third-quarter of 2008. During the fourth-quarter of 2008, there was capital flight amounting to 10 percent of GDP and a corresponding depreciation of the currency. Beginning in 2009, however, capital flows resurged into Asia, reaching precrisis levels. Figure 7.2 juxtaposes the surge in capital flows with the South Korean won, which appreciated over 30 percent during the period. In South Korea, and throughout the region, currency appreciation and asset bubbles were a significant worry throughout 2010 and into 2011. The carry trade can be destabilizing for four reasons. First, if capital flows are large enough, such speculation can cause undue volatility of exchange rates and asset prices in developing economies. Second, relatively small interest rate or currency changes can trigger an unwinding of (highly leveraged) positions which can cause sudden stops and capital flight. Third, a sudden unwinding of positions where the investment entity is highly interconnected with other parts of the financial system to the extent that its demise might cause systemic risk, the carry trade can threaten general financial stability (Brunnermeier, 2008).
Fourth, in an environment where nations have open capital accounts, the carry trade can have further destabilizing effects in terms of policy space for independent monetary policy. The dominant tool to stem asset bubbles or inflation is the interest rate. However, because of the carry trade, the intended result can be the reverse if interest rates are low abroad. Given that rates were (p.121) over 10 percent in Brazil and less than 1 percent in the United States, raising interest rates to curb asset bubbles and inflation would actually attract more capital flows, not less.
Keynes saw this as a fundamental concern:
In my view the whole management of the domestic economy depends on being free to have the appropriate rate of interest without reference to the rates prevailing elsewhere in the world. Capital controls is a corollary to this. (Quoted in Helleiner, 1994: 34)
Paul Davidson, elaborating on Keynes’s rationale for capital controls, said:
If there is a sudden shift in the private-sector’s bull–bear disposition, what can be called the bandwagon effect, then price stability requires regulations constraining capital flows into and/our out of the market to prevent the bears from liquidating their position too quickly (or the bulls from rushing in) and overcoming any single agent (private or public) who has taken on the responsible task of market maker to promote “orderliness.” (Davidson, 2009: 100)
The carry trade has become highly utilized by shadow banking entities such as hedge funds. In the run-up to the crisis, it was the United States that was affected by such activity. By 2004–5, hedge funds became major players in the carry (p.122) trade, often borrowing in the Japanese yen market where rates were relatively high, and investing in the United States (D’Arista and Griffith-Jones, 2010).
In the wake of the crisis, hedge funds have begun to short the dollar and go long on currencies from countries with healthier economies and higher interest rates. The carry trade can be lucrative in at least three ways for investors. First is the interest rate differential. If the US interest rate is 0.025 and Brazil’s is 10.50, then the differential could be 10.25 (minus transaction costs). The real profits come from leverage and the exchange rate movements. Hedge funds speculate that the higher rate currency is going to appreciate in addition to earning the interest rate differential. Profits can ramp up depending on the leverage factor. A leverage factor of 5 on a 10.25 differential is a profit of 50.25 percent and a ratio of 10 on a 10.25 differential could be 100.25 percent. Third, those profits come when exchange rates stay stable, but can be magnified when the currency shorted depreciates and the long position appreciates. Given the more robust growth and higher interest rates in emerging markets, the carry trade resulted in another mass inflow of capital to the developing world in 2009–11.
Brazil is a case in point with interest rates of over 10 percent in 2009 and 2010 and the US interest rate of close to zero. Brazil saw an appreciation of over 30 percent due in part to the carry trade. Indeed, it was Brazil that was most vocal at the 2010 G20 summit in Seoul where the Brazilian finance minister declared the surge in capital flows, the subsequent appreciations, and the myriad reactions to the surges as the beginning of a “currency war.” As Figure 7.3 shows, Latin America has also seen a resurgence of capital flows, and currency concerns have plagued nations such as Brazil, Chile, and others.
Source: IMF World Economic Outlook, October 2011.
In an attempt to throw a wedge between the interest rate differential and its detrimental effects on financial stability, many nations resorted to capital controls in 2009 and 2010.
Capital Controls and Other Capital Management Techniques
Capital controls are deployed to help buffer from a number of risks that come with financial integration. Chief among those risks are currency risk, capital flight, financial fragility, contagion, and sovereignty (Grabel, 2003). All of these risks have been accentuated during the GFC. As previously noted, the uptick in the carry trade from 2009 to 2011 put pressures on currency and financial fragility, and made it more difficult for nations to have sovereignty over monetary policy. Capital controls are seen as macro-prudential regulations that can help manage those risks (Ocampo et al., 2008).
Economists usually differentiate between capital controls on capital inflows and controls on outflows. Moreover, measures are usually categorized as being “price-based” or “quantity-based” controls. Figure 7.4 lists examples of controls (p.123) on inflows and outflows, though sometimes the distinction can be murky (Ocampo et al., 2007; Epstein et al., 2008). Examples of quantity-based controls are restrictions on currency mismatches, and minimum stay requirements and end-use limitations. Many of these have been used by nations such as China and India. Examples of price-based controls include taxes on inflows (Brazil) or on outflows (Malaysia). Unremunerated reserve requirements are both. On one hand they are price-based restrictions on inflows, but they also include a minimum stay requirement which can act like a quantity-based restriction on outflows.
Controls are most often targeting foreign currency and local currency debt of a short-term nature. Foreign direct investment is often considered less volatile and less worrisome from a macroeconomic stability standpoint. Inflow restrictions on currency debt can reduce the overall level of such borrowing and steer investment toward longer term productive investments and thus reduce risk. Taxes on such investment cut the price differential between short- and long-term debt and thus discourage investment in shorter term obligations. Outflows restrictions and measures are usually deployed to “stop the bleeding” and keep capital from leaving the host nation too rapidly. A variety of these techniques have been used during the GFC. Indeed, as previously noted, the IMF found that those nations that deployed controls were among the least hard hit by the crisis (Ostry et al., 2010).
While currency appreciation, asset bubbles, and inflation became a concern across the developing world in 2009–11, not all nations deployed capital controls. Some nations, such as Chile, Japan, and Mexico, intervened in currency markets by purchasing dollars in order to weaken their own currencies. Another interesting case was that of Turkey, that actually lowered interest rates to stem asset bubbles and inflation. Citing the carry trade, Turkey lowered rates hoping to shorten the spread between US and Turkish interest rates and thus cool off the economy. Figure 7.5 exhibits an illustration of a number of nations that have deployed some sort of capital management technique on capital inflows during the crisis.
Sources: Bloomberg, various dates, Financial Times, and IMF World Economic Outlook, October 2010.
This list is only illustrative of changes in capital control regulations in 2009 and 2010. According to the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions, 2010, 144 countries report capital controls on capital market securities, 124 on money market instruments, 94 on derivatives, 86 on commercial credits, and 120 on financial credits (IMF, 2010). This stands in contrast with 1995, where only 119 nations reported capital controls of any kind to the IMF (Helleiner, 1998). The list in Figure 7.5 exhibits some of the major nations that have instated controls during the 2009–11 period, but (p.125) does not list nations such as India and China that have had controls throughout.
With the exception of Brazil, the nations that have received the most attention for deploying capital controls are in East Asia. Brazil, South Korea, and Taiwan have been the most aggressive in deploying controls. As the figure shows, those three nations “fine tuned” their controls in a number of instances.
By October of 2009, Brazil’s exchange rate pressures became acute, and on October 20, Brazil resorted to capital controls. Brazil deployed a tax on inflows, referred to as the “IOF tax” (IOF is Imposto sobre Operações de Crédito, Câmbio e Seguro, ou relativas a Títulos e Valores Mobiliários in Portuguese). The initial tax rate was 2 percent that applied conversion of foreign currency into Brazilian reais related to equity or debt investments by foreign investors on the Brazilian stock exchanges or the over-the-counter derivatives market, as well as private investment funds (FIP), Brazilian treasury notes, and other fixed income securities.
(p.126) While the exchange rate cooled upon announcement of the controls, the controls were seen as ineffective partly due to evasion. Brazil determined that foreign investors were circumventing controls by disguising short-term capital as foreign direct investment, through currency swaps and other derivatives, and by purchasing American depository receipts (ADRs). ADRs are issued by US banks and allow investors to buy shares of firms outside the United States—enabling investors to purchase Brazilian shares but in New York and thereby skirt controls in Brazil. Therefore, on November 18, Brazil moved to put a 1.5 percent tax on ADRs to stem speculating around the October controls. A year later, Brazil’s exchange rate continued to appreciate and Brazil increased the IOF tax to 4 and then 6 percent. In interviews with private investors, the Financial Times reported that the tax did not factor into investor decision-making given that the interest rate differential between the United States and Brazil was so wide. However, when the tax was raised to 6 percent, some investors began to see the trade as less profitable and shied away (Jopson, 2011). Nevertheless, in early January of 2011, Brazil made yet another move. Starting on January 6, Brazilian financial institutions had to begin to deposit the equivalent of 60 percent of any short dollar position with the central bank to curtail betting against the domestic currency.
Nations across Asia deployed controls in 2009. Indeed, they were told to do so by the ADB. In April of 2010, the President of the ADB said: “With the possibility of resurgent capital inflows, it is essential that they are managed effectively. An appropriate mix should address currency flexibility, clear and stable monetary and fiscal policy, an appropriate regulatory and supervisory framework, and even temporary capital controls” (Yong and So, 2010).
South Korean saw some of the largest appreciation in its currency, the won. Starting in July of 2010, South Korean banks had to limit their currency forward and derivatives positions at 50 percent of their equity capital. For foreign banks, the ceilings were set at 250 percent of their equity capital, against the current level of around 300 percent. Furthermore, South Korea tightened the ceilings on companies’ currency derivatives trades to 100 percent of underlying transactions from the current 125 percent. Also, at that time, South Korea sought to steer investment away from speculative capital by requiring that (with some exceptions) bank loans in foreign currency be allowed solely for the purchase of raw materials, FDI, and repayment of debts. Following skirmishes with North Korea, South Korea also taxed outflows in December of 2010.
Taiwan has also introduced controls on numerous occasions. Interestingly, in the Taiwanese case, they would signal to markets that capital controls were coming a few weeks or sometimes months before each move. Indeed, Taiwan’s Central Bank Governor urged other nations across Asia to use capital controls as well (Chang, 2010). Taiwan’s moves followed the timing of others. In November of 2009, Taiwan put in place bans on foreign funds from investing (p.127) in time deposits in a move aimed at deterring bets on currency appreciation. Twice at the end of 2010, Taiwan limited the percentage of currency that could be held by banks.
Of course the other significant Asian nation that received mass inflows of capital during this period was China. From 2009 to 2011, there were daily reports in the English-language press that China was experiencing a housing boom and inflation (stocks do not trade freely in China and of course its exchange rate is pegged to the US dollar). China has deployed controls for quite some time, and the majority of those controls would be considered quantitative controls. For instance, China does not permit foreigners to invest in China’s money markets or derivatives markets, and an intricate approval process is involved for foreigners to take part in stock and bond trading. Similar measures apply for outflows. Given China’s pegged exchange rate, it suffers from the “impossible trinity” described above and China sees it as important to have an autonomous monetary policy. Numerous studies have shown that China’s capital controls continue to be effective to this end, though there has been some weakening (Ma and McCauley, 2007). In 2011, China relaxed some of its outflows controls to take the pressure off extreme inflows of capital. Before January of 2011, Chinese exporters used to have to turn over the majority of their US dollar (profits) to the Chinese government in exchange for yuan. To stem asset bubbles and inflation, China moved to allow foreigners to keep their money abroad (Xin and Rabinovitch, 2011).
Just One Rock in a Swiftly Flowing Stream? A Preliminary Analysis
This section of the chapter performs a preliminary analysis of controls in three countries that have resorted to controls since the crash of Lehman Brothers in 2008. A full econometric analysis is in order along the lines of a chapter I did that tested the impact of capital controls in Colombia and Thailand in the run up to the crisis in 2007 (Coelho and Gallagher, 2010). At this writing, however, the data needed to compile a comprehensive database of independent variables from which to complete such an analysis is not yet available. Nevertheless, this preliminary analysis can shed light on how the dependent variable behaved in general. A number of minor statistical tests and counterfactuals are presented to interpret the data.
The stated goal of capital controls on inflows is to create a space for independent monetary policy, and to stem the appreciation of the currency and the rise in asset prices. In this section of the chapter then, I examine trends in interest rate differential, currencies, and asset prices in Brazil, Taiwan, and South Korea—three nations in Figure 7.5 that have been most aggressive in their use of controls in the wake of the crisis. If we are to see an effect of (p.128) controls anywhere, it would be in these nations. Figure 7.6 summarizes the results of these exercises. All data for these analyses are from Bloomberg (Bloomberg, 2011) (full statistical results can be found at http://www.peri.umass.edu/236/hash/143733ae92ce3b8ab9c2ab0a3ced57c4/publication/444/).
Source: Bloomberg Terminal, accessed February 11, 2011.
Interest Rate Differentials
Given that the surge in capital inflows is in large part due to the carry trade, the logical place to start a preliminary examination is by looking at interest rates. As shown in Figure 7.6, the cases of Brazil, South Korea, and Taiwan all provide some evidence that interest rates between the United States and each of these nations have become less correlated and that the interest rate differential have widened. This indicates that the controls in each of these nations have to some extent met their objective of allowing a nation to have a more autonomous monetary policy.
The spread on interest rates via the carry trade is one of the key incentives to move capital to emerging markets. Standard theory indicates that capital will flow from nations with lower interest rates to those with higher rates, eventually equalizing the two. The covered interest rate theorem states that in an environment of perfect capital mobility, interest rates should converge (Stein, 1962; Alibert, 1973). According to the interest rate parity theorem (equation 1):
where r and r * are interest rates in two different countries and F is the forward exchange rate between the two countries’ currencies, and s is the spot rate. The differential should be zero or moving toward zero with free movement of capital between both nations.
In Brazil, South Korea, and Taiwan, the interest rate differential eventually widens after successive controls are put in place, and the interest rates between each country and the United States eventually become less correlated.1 Figure 7.7 exhibits comparable interest rates for Taiwan and the United States for illustrative purposes. Different instances of capital controls are noted with text boxes and arrows. It appears that the controls on inflows had no real impact on interest rate differentials in November of 2009, but after currency controls and reserve requirements at the end of 2010 there was indeed a move away from parity.
Source: Bloomberg Terminal, accessed February 11, 2011.
However, there is also some degree of consensus in the literature that interest parity examinations must also adjust for the future expectations of interest and exchange rates. If expectations are that an interest rate will decrease, such expectations will be reflected in futures prices and the differential would need to be adjusted downward. Interest rate differentials are adjusted upward in cases where the interest rate is expected to increase. Therefore, it is common to (p.129) (p.130) examine the interest rate differential by adjusting for the forward discount. To calculate the extent to which there is deviation in the adjusted interest rate differential, the following calculation is made (equation 2):
here d is the deviation from the parity condition. One common test to analyze the extent to which controls are effective is to examine whether the interest rate differential adjusted for the forward discount is more or less correlated (or deviating) before and after a control is deployed. If a policy measure was meeting its stated goal, the interest rates would be less correlated. This would indicate that the nation would be able to deploy more independent monetary policy.
Interest rate differentials and interest rate differentials adjusted for the forward discount are computed for Brazil, Taiwan, and South Korea’s controls. In each case the average interest rate differential is examined before and after a control is deployed. Here, the results are more mixed. In Brazil, the adjusted interest rate differential does not widen until after Brazil strengthens the IOF tax to 6 percent. This is consistent with anecdotal evidence reported in the Financial Times: “But the bond tax, known as the IOF, can take a large chunk of (p.131) any profit flowing from that gap, especially for investors trading on timescales of less than a year. Several fund managers told beyondbrics, the FT’s emerging market blog, the appeal of the carry trade had diminished considerably as a result” (Jopson, 2011). In Taiwan, there was also an eventual widening of the adjusted interest rate differential, but in the case of South Korea the differential narrows. Figure 7.8 exhibits the trend for Brazil.
Note: Calculated as [(BRL Deposit - USD LIBOR) - (Fwd NDF Rate - Spot Rate)].
Source: Bloomberg Terminal, accessed February 11, 2011.
Another key goal of capital management techniques is to stem the rise of the exchange rate. If capital controls were to have any effect on the exchange rate, we would expect to see a depreciation or at least a slower rate of appreciation after a control was deployed. For this chapter, the absolute level of exchange rate appreciation or depreciation before and after a control is measured, as is the rate of appreciation. Again, in the cases of Brazil and Taiwan, there is some evidence that controls are associated with a lower level of appreciation and an eventual slowing of the rate of appreciation. However, in the case of South Korea, currency appreciation continues and the rate of appreciation increases after controls are initiated.
Capital controls are also established in an attempt to cool overheating of asset prices, namely stock and real estate markets. There is some, but more limited, evidence that controls are associated with the desired effects in stock markets. For this chapter, a preliminary analysis of stock markets was conducted. If we were to observe a positive impact of controls on asset prices, we would expect that prices would either decrease or increase at a lower rate. Unfortunately, the real estate market was not available for this analysis, and only stock market indices are analyzed. As a counterfactual, results are juxtaposed with regional averages. Thus, if controls were to meet their stated goals, they would be associated with a decrease in the stock index (or a slower increase) that was also more of a decrease than the regional average. In Brazil, the stock market index continued to rise after each measure was introduced but the total amount of appreciation after the measure was introduced was less than in the period before the measure and in each case the rate of increase was less than the regional average. However, the rate of stock market increase fluctuates between each measure, though it always seems to be better than the regional average. For this chapter, I also examined exchange rates and stock market indices indexed to 100 on January 1, 2008. In South Korea, the index continues to rise after each measure but the total amount of increase is lower than in the period previous to the measure and is less of a rise than the regional average. After the final measure is introduced, there is an actual decrease in the stock market index and a decrease that is sharper than the regional average. In Taiwan, the results are similar, with lower levels of increase after each measure with an eventual decrease but one that is less so than the region as a whole.
This chapter has traced the reemergence of capital controls as effective tools to promote financial stability, in both theory and practice. There has been great rethinking of capital controls, so much so that a number of nations deployed them in the wake of the GFC and that the global community is now poised to consider a global regime. The chapter examines capital controls in three countries: Brazil, South Korea, and Taiwan. The preliminary analysis conducted reveals some evidence that controls were eventually effective in Brazil and Taiwan, but less so in South Korea.
It is quite remarkable that capital controls continue to have some positive effect, given the sheer level of capital flows in today’s global economy, the lack of national effectiveness in governing controls, and foremost the lack of (p.133) international cooperation (and even acceptance) with regards to capital flows. To echo the IMF, capital controls are now an essential part of the financial stability toolkit. However, to ensure that capital controls are fully effective, they will have to be buttressed by national and global level compliance and cooperation. There are at least five challenges to achieving full effectiveness: designing stiff regulations, creating effective compliance of regulations, harnessing global coordination of regulation, and perhaps most challenging is the political–economic context of decision-making.
First, at the national level, capital controls will need to be designed with more strength and be accompanied by significant levels of surveillance mechanisms. One of the reasons why some of the more recent uses of controls appear to be lackluster in their effectiveness is that they are weak relative to the spread in the carry trade. In the 1990s, Chile and Colombia each deployed unremunerated reserve requirement (URRs). A URR is a mandatory noninterest-bearing deposit in foreign currency at the Central Bank for a certain period in an amount proportional to the size of the capital flow (30 percent for Chile, 47 percent for Colombia). The tax equivalent of Chile’s controls averaged 4.24 percent and was as high as 7.7 percent. Colombia’s ranged from 6.4 to 13.6 percent (Ocampo and Tovar, 1999). Each of these tax equivalents is almost two to seven times stronger than Brazil’s initial IOF tax controls.
A second challenge for national governments is the ability of nations to circumvent controls. One of the most profound ways that controls have been circumvented in Brazil’s past has been through disguising short-term capital as FDI. In Brazil, investors would create a public company and list it on the BOVESPA. The investor would own all the company’s shares and manipulate their price by arranging purchase and sale at low liquidity. The foreign investor would then invest in the public company as a foreigner and deem the investment an FDI investment because it acquired more than half of the shares and then performed interfirm loans that are considered FDI (Carvalho and Garcia, 2006).
China has an intricate and notable surveillance system. In August of 2008, China instated a new regime that gives numerous authorities the power to verify foreign exchange flows. Indeed, among other measures, numerous ministries have linked computer systems that check and track the “authenticity” of foreign exchange transactions to “eliminate the discrepancies between the true proceeds from exports and the reported receipts of foreign exchange” (Yu, 2009: 9).
Third, national efforts alone cannot solely be relied on to regulate capital flows. As Keynes and White articulated when framing the Bretton Woods system, global coordination is the key to effective capital flow management. Coordination is needed in three ways. First, nations need to help each other (p.134) cooperate on policing capital controls. Helleiner quotes Keynes as saying controls will be more difficult to make work “by unilateral action than if movements of capital can be controlled at both ends” (Helleiner, 1994: 24). According to Helleiner (1994), Keynes and White saw nations cooperating to share information about financial holdings within their countries that might have been disguised to circumvent controls, helping to repatriate capital that left a nation illegally, and even blocking flows of capital seen as illegal in a sending nation.
In the wake of the GFC, some authors proposed coordinated imposition of capital controls. For instance, to mitigate the effects of the carry trade, to place controls on outflows in nations with a low interest rate corresponding with controls on inflows in nations with a higher rate (Griffith-Jones and Gallagher, 2011). Indeed, this occurred to some degree of success in the 1960s. In the late 1960s, the United States experienced balance of payments difficulties due to expansionary monetary and fiscal policies (which included relatively low interest rates). Meanwhile, European governments had grave concerns over capital inflows due to higher rates and anti-inflationary policy.
The United States put in place outflows controls. US outflows controls took the form of the Interest Equalization Tax that taxed US residents investing in foreign securities, and Europe controlled inflows (Block, 1977). Econometric evidence has shown that the US controls on outflows were effective in allowing the United States to maintain an independent monetary policy despite the fact that the controls exempted banks who wanted to speculate in the Eurodollar market (Obstfeld, 1993). In an act of coordination, in 1971, France convinced the United States to maintain its outflows controls and West Germany to tighten them. The French went on to advocate that the powers of the IMF be extended to facilitate such coordination (Helleiner, 1994).
Another area for cooperation will be to strip away the patchwork of legal barriers to capital controls that are found in trade and investment treaties. Many treaties now cover financial instruments and investment, and prohibit nations from deploying capital controls even on a temporary basis. At minimum, a uniform safeguard exception to all trade agreements would need to be crafted, but would run against many vested interests.
It is clear that a new era has arisen in terms of capital controls. Institutions such as the IMF have come to recommend the national use of capital controls and many nations are following suit. In December of 2010, the IMF also recognized the need for cooperation on capital controls, and proposes that it fill that role. The IMF proposes to engage in helping nations to design effective capital controls, in bilateral and multilateral surveillance of controls, and to help create the policy space in trade and investment treaties for safeguard clauses to allow for controls (IMF, 2010). It is not clear that the IMF has the legal standing to actually play the role it wants, and it is also not (p.135) clear that the institution has the political legitimacy in many nations to carry out such a task.
Reflecting on the early discussion of the Bretton Woods system when capital controls were seen as a core of the global financial system, political obstacles may be the biggest challenge for twenty-first-century capital controls. It is clear that there has been a change in general thinking regarding states and markets, developments in economic evidence that support capital controls, and a change in the level of global hegemony. It remains to be seen if such change is enough to create a level of twenty-first-century embedded liberalism to enable a stable financial system.
The political obstacles to global coordination and national effectiveness for capital controls would have to overcome significant collective action problems. While all nations and actors within them benefit from financial stability, there are individual financial sectors that will have to bear short-term costs. These “losers” of a capital control regime are highly concentrated and very powerful politically. The “winners” in terms of the general public are diffuse across the entire system and may suffer from information externalities where they cannot “connect the dots” between capital regulations, financial stability, and personal welfare to the extent that they would mobilize politically. Second, there are free-rider problems. If all nations do not enact cooperation and control, then hot money can cascade where regulations are most lax. One nation’s strong regulation could trigger speculation among its neighbors. Though it is increasingly becoming understood that capital controls help markets “get the prices right,” a bigger challenge is “getting the political economy right.”
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(*) The author would like to thank Elen Shrestha for diligent research assistance in the preparation of this chapter.
(1.) For the full statistical tables relating to Figure 7.6 and further calculations, see: http://www.peri.umass.edu/236/hash/143733ae92ce3b8ab9c2ab0a3ced57c4/publication/444/