Capital Flows

Letter: The threat is greatest for the developing and emerging countries From Nelson Barbosa and others

Developing and Emerging Countries need Capital controls to prevent Financial Catastrophe

All countries currently face the unprecedented threat of a simultaneous and global health crisis, economic recession and financial meltdown. But unlike rich nations, emerging and developing countries  (DECs) lack the policy autonomy needed to confront these crises. The global currency hierarchy places DECs in the periphery of global financial markets, exposing them to sudden stops caused by triggers such as the COVID-19 crisis. The US Federal Reserve announced it would lend up to USD 60bn to the central banks of Mexico, Brazil, South Korea and Singapore. But this is not enough. Immediate capital controls, coordinated by the IMF, are needed to prevent financial disaster.

In a global financial crisis, there is a rush to hold liquid assets denominated in safe currencies, especially US dollars. This enables rich countries to respond to crises with the necessary fiscal and monetary tools. The opposite is true for DECs. Since the outbreak of the COVID-19 crisis, international investors have withdrawn large sums from DEC assets, leading to dramatic currency depreciation, especially for those exposed to falling commodity prices.

Over the past decade, ample global liquidity driven by rich country central banks, alongside sustained demand for liquid assets, has led to enormous flows of credit and equity investment into DECs, where bond and stock markets grew from about 15 trillion to 33 trillion US dollars between 2008 and 2019. ‘Frontier economies’ and DECs corporations have issued substantial volumes of foreign currency debt. With G20 encouragement, DECs opened their domestic currency bond markets to international investors. In what has been termed the second phase of global liquidity, new financial instruments and institutions, such as international funds and exchange-traded funds (ETFs), have enabled easy global trading of DECs assets, cementing the illusion of liquidity.

DECs are now confronted with a sudden stop as global liquidity conditions tighten and investors flee from risk: exposure to DECs remains a high-risk/high-return strategy, to be liquidated in times of crisis. In consequence, DECs face severe macroeconomic adjustment at precisely the moment when all available tools should be used to counter the public health crisis presented by COVID-19: some countries may be forced to tighten monetary policy in an attempt to retain access to the US dollar, while fiscal action may be constrained by fear of losing access to global markets. Foreign exchange reserves are unlikely to provide a sufficient buffer in all countries. This would have profound consequences for the global economy: DECs, both in the G20 and beyond, are now far more important for global growth and markets than even a decade ago. The failure of a large sovereign or quasi-sovereign borrower could trigger significant contagion.

There is an urgent need for action to prevent this crisis reaching catastrophic proportions in DECs. Despite long-standing calls for action, there is still no international lender of last resort. The only instruments currently available are IMF lending and foreign exchange (FX) swap lines between central banks. IMF loans typically impose fiscal tightening, which would be disastrous under current conditions. The US Federal Reserve stands ready to provide US dollars to a handful of major central banks: among DECs, only Mexico can access Fed and US Treasury swap lines under NAFTA provisions, and South Korea and Brazil have just had their arrangements re-opened. But these ad-hoc arrangements exclude a large proportion of DECs’ need for dollar liquidity.

We call for decisive action to constrain the financial flows currently transmitting the crisis to EMs. Capital controls should be introduced to curtail the surge in outflows, to reduce illiquidity driven by sell-offs in DECs’ markets, and to arrest declines in currency and asset prices. Implementation should be coordinated by the IMF to avoid stigma and prevent contagion. FX swap lines should be extended to include more DECs, in order to ensure access to US dollars. Finally, we concur with recent calls for greater provision of liquidity by the IMF using special drawing rights (SDRs) – but this must take place without the imposition of pro-cyclical fiscal adjustment.

The unfolding crisis is one of the most serious in economic history. We must ensure that governments can do everything possible to protect their citizens. In our globally integrated economy, coordinated action is needed to minimise the externally-imposed constraints on developing and emerging countries as they face the triple threat of pandemic, recession and financial crisis.

Organising Signatories

  1. Nelson Barbosa, Sao Paolo School of Economics
  2. Richard Kozul-Wright, UNCTAD
  3. Kevin Gallagher, Boston University
  4. Jayati Ghosh, Jawaharlal Nehru University
  5. Stephany Griffith-Jones, Columbia University
  6. Adam Tooze, Columbia University
  7. Bruno Bonizzi, University of Hertfordshire
  8. Daniela Gabor, UWE Bristol
  9. Annina Kaltenbrunner, University of Leeds
  10. Jo Michell, UWE Bristol
  11. Jeff Powell, University of Greenwich

Signatories

  1. Adam Aboobaker, University of Massachusetts Amherst
  2. Kuat Akizhanov, University of Birmingham and University of Bath
  3. Ilias Alami, Maastricht University
  4. Donatella Alessandrini, University of Kent
  5. Jeffrey Althouse, University of Sorbonne Paris Nord
  6. Carolina Alves, Girton College – University of Cambridge
  7. Paul Anand, Open University and CPNSS London School of Economics
  8. Phil Armstrong, University of Southampton Solent and York College
  9. Paul Auerbach, Kingston University
  10. Frauke Banse, University of Kassel, Germany
  11. Benoît Barthelmess, Le Club Européen
  12. Pritish Behuria, University of Manchester
  13. Kinnari Bhatt, Erasmus University Rotterdam
  14. Samuele Bibi, Goldsmiths University
  15. Joerg Bibow, Skidmore College
  16. Pablo Bortz, National University of San Martín
  17. Alberto Botta, University of Greenwich\
  18. Benjamin Braun, Institute for Advanced Study, Princeton
  19. Louison Cahen-Fourot, Vienna University of Economics and Business
  20. Jimena Castillo, University of Leeds, UK
  21. Eugenio Caverzasi, Università degli Studi dell’Insubria
  22. Jennifer Churchill, Kingston University, London
  23. M Kerem Coban, GLODEM, Koc University, Turkey
  24. Andrea Coveri, University of Urbino, Italy
  25. Moritz Cruz, UNAM, Mexico\
  26. Florence Dafe, HfP/TUM School of Governance, Munich
  27. Yannis Dafermos, SOAS University of London
  28. Daria Davitti, Lund University, Sweden
  29. Adam Dixon, Maastricht University
  30. Cédric Durand, Université Sorbonne Paris Nord
  31. Chandni Dwarkasing, University of Siena, Italy
  32. Gary Dymski, University of Leeds
  33. Ilhan Dögüs, University of Rostock, Germany
  34. Carlo D’Ippoliti, Sapienza University of Rome
  35. Dirk Ehnts, Technical University of Chemnitz
  36. Luis Eslava, Kent Law School, University of Kent
  37. Trevor Evans, Berlin School of Economics and Law
  38. Karina Patricio Ferreira Lima, Durham University
  39. José Bruno Fevereiro, The Open University Business School
  40. Giorgos Galanis, Goldsmiths, University of London
  41. Santiago José Gahn, Università degli studi Roma Tre
  42. Jorge Garcia-Arias, University of Leon, Spain and SOAS, University of London
  43. Alicia Girón – UNAM-MEXICO
  44. Thomas Goda, Universidad EAFIT, Colombia
  45. Antoine Godin, University Sorbonne Paris Nord
  46. Jesse Griffiths, Overseas Development Institute
  47. Diego Guevara, National University of Colombia
  48. Sarah Hall, University of Nottingham
  49. Nicolas Hernan Zeolla, National University of San Martin, Argentina
  50. Hansjörg Herr, Berlin School of Economics and Law
  51. Elena Hofferberth, University of Leeds
  52. Jens Holscher, Bournemouth University
  53. Peter Howard-Jones, Bournemouth University
  54. Bruno Höfig, SOAS, University of London
  55. Roberto Iacono, Norwegian University of Science and Technology
  56. Stefanos Ioannou, University of Oxford
  57. Andrew Jackson, University of of Surrey
  58. Juvaria Jafri, City University of London
  59. Frederico G. Jayme, Jr, Federal University of Minas Gerais, Brazil
  60. Emily Jones, University of Oxford
  61. Ewa Karwowski, University of Hertfordshire
  62. Y.K. Kim, University of Massachusetts Boston
  63. Stephen Kinsella, University of Limerick
  64. Kai Koddenbrock, University of Frankfurt
  65. George Krimpas, University of Athens
  66. Sophia Kuehnlenz, Manchester Metropolitan University
  67. Ingrid Harvold Kvangraven, University of York
  68. Dany Lang, Université Sorbonne Paris Nord
  69. Jean Langlois, Le Club Européen
  70. Christina Laskaridis, SOAS, University of London
  71. Lyla Latif, University of Nairobi
  72. Thibault Laurentjoye, École des Hautes Études en Sciences Sociales (EHESS), Paris
  73. Dominik A. Leusder, London School of Economics
  74. Noemi Levy-Orlik, UNAM, Mexico
  75. Lorena Lombardozzi, Open University
  76. Anne Löscher, University of Siegen, Germany; University of Leeds
  77. Pedro Mendes Loureiro, University of Cambridge
  78. Victor Isidro Luna, UNAM
  79. Andrew M. Fischer, Erasmus University Rotterdam
  80. Jonathan Marie, Université Sorbonne Paris Nord
  81. Norberto Montani Martins, Federal University of Rio de Janeiro, Brazil\
  82. Olivia Bullio Mattos, St. Francis College, New York, USA
  83. Andrew Mearman, University of Leeds
  84. Monika Meireles, UNAM
  85. Thorvald Grung Moe, Levy Economics Institute
  86. Lumkile Mondi, University of the Witwatersrand, South Africa\
  87. Thanti Mthanti, University of the Witwatersrand, South Africa\
  88. Susan Newman, Open University
  89. Howard Nicholas, International Institute of Social Studies, Erasmus University Rotterdam
  90. Maria Nikolaidi, University of Greenwich
  91. Patricia Northover, University of the West Indies, Jamaica
  92. Cem Oyvat, University of Greenwich
  93. Oktay Özden, Marmara University, Turkey
  94. Vishnu Padayachee, University of the Witwatersrand
  95. Rafael Palazzi, PUC-Rio, Brazil
  96. José Gabriel Palma, Cambridge University and USACH
  97. Marco Veronese Passarella, University of Leeds
  98. Jonathan Perraton, University of Sheffield
  99. Keston K. Perry, UWE Bristol\
  100. Mate Pesti, UWE Bristol
  101. Karl Petrick, Western New England University
  102. Christos Pierros, University of Athens
  103. Leonhard Plank, TU Wien
  104. Jose Pérez-Montiel, University of the Balearic Islands, Spain
  105. Hao Qi, Renmin University of China
  106. Mzukisi Qobo, Wits Business School, University of Witwarsrand
  107. Joel Rabinovich, University of Leeds
  108. Dubravko Radosevic, University of Zagreb
  109. Miriam Rehm, University of Duisburg-EssenMarco Flávio da Cunha Resende, Federal University of Minas Gerais, Brazil\
  110. Lena Rethel, University of Warwick
  111. Sergio Rossi, C University of Fribourg, Switzerland
  112. Maria Jose Romero, Eurodad
  113. Roy Rotheim, Skidmore College
  114. Josh Ryan-Collins, UCL Institute for Innovation and Public Purpose
  115. Alfredo Saad Filho, King’s College London
  116. Lino Sau, University of Torino, Italy
  117. Malcolm Sawyer. Emeritus Professor of Economics, University of Leeds
  118. Anil Shah, University of Kassel
  119. Dawa Sherpa, Jawaharlal Nehru University
  120. Hee-Young Shin, Wright State University
  121. Farwa Sial, Global Development Institute, University of Manchester
  122. Crystal Simeoni, FEMNET, Nairobi, Kenya
  123. Engelbert Stockhammer, King’s College London
  124. Ndongo Samba Sylla, Dakar
  125. Celine Tan, University of Warwick
  126. Gyekye Tanoh, Accra
  127. Daniela Tavasci, School of Economics and Finance, Queen Mary University of London
  128. Andrea Terzi, Franklin University Switzerland
  129. Daniele Tori, Open University Business School
  130. Gamze Erdem Türkelli, University of Antwerp
  131. Esra Ugurlu, University of Massachusetts Amherst\
  132. Tara Van Ho, University of Essex \
  133. Sophie Van Huellen, SOAS University of London
  134. Frank Van Lerven, New Economics Foundation
  135. Elisa Van Waeyenberge, SOAS University of London
  136. Paolo Vargiu, University of Leicester
  137. Luigi Ventimiglia, School of Economics and Finance, Queen Mary University of London
  138. Apostolos Vetsikas, University of Thessaly, Greece
  139. Davide Villani, The Open University and Goldsmiths, University of London\
  140. Camila Villard Duran, University of Sao Paulo\Pablo Wahren, University of Buenos Aires\Neil Warner, London School of Economics\Mary Wrenn, UWE Bristol\Devrim Yilmaz, Université Sorbonne Paris Nord
  141. Pablo Wahren, University of Buenos Aires
  142. Neil Warner, London School of Economics
  143. Mary Wrenn, UWE Bristol
  144. Devrim Yilmaz, Université Sorbonne Paris Nord

(A shorter version of this letter was published in the Financial Times on 25 March 2020.)

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