* IMF sets out institutional view on capital flows
* Flows helpful to countries but can be destabilizing force
* Emerging economies call IMF view too prescriptive
By Lesley Wroughton
WASHINGTON, Dec 3 The International Monetary
Fund on Monday unveiled principles for how countries should
manage international capital flows, agreeing that some measures
to limit an influx of capital can be useful but should be
targeted, transparent and temporary.
Emerging markets have blamed loose monetary policies in rich
nations for spurring destabilizing flows of hot money, and the
IMF is trying to forge a consensus on when it makes sense for
nations to resort to capital curbs.
The IMF emphasized it new "institutional view" was not
mandatory and said whether or not a country follows them would
have no bearing on IMF financing decisions.
The IMF broke from its long-held position that regulating
capital flows was bad in 2010. Since then, it has tried to forge
rules of the road for capital flows management, but its
membership is divided over what those rules should be.
Among the principles, the IMF recommended that capital flow
measures should not substitute for macroeconomic adjustment; in
certain circumstances curbs can be useful when underlying
macroeconomic conditions are highly uncertain; measures are
useful to safeguard financial stability when surges contribute
to systemic risks; and countries should make sure their policies
do not harm others.
Investment flows can help countries develop and grow, but
they can also drive up inflation and exchange rates. In
addition, a sudden investor withdrawal can be destabilizing.
Countries from Brazil to Indonesia, South Korea, Peru and
Thailand have all imposed controls to limit inflows since 2009,
while a few countries like Argentina, Iceland and Ukraine have
sought to stem large or sudden capital outflows.
"Directors agreed that in certain circumstances, capital
flows can be useful and appropriate," the IMF said. "These
circumstances include situations in which the room for
macroeconomic policy adjustment is limited, or appropriate
policies take undue time to be effective.
"Directors stressed the (capital flow management measures)
should not substitute for warranted macroeconomic adjustment."
Capital flow management remains a hot-button topic, with
several emerging economies arguing the principles are too rigid.
Emerging economies, like Brazil, have criticized the U.S.
Federal Reserve for its ultra-loose monetary policy, warning
that the easy money meant to boost the U.S. recovery is pouring
into their economies, raising the risk of inflation and asset
bubbles and choking exports by driving their currencies up.
Brazil has argued that governments must have the flexibility
and discretion to adopt policies they consider necessary to
offset the type of aggressive monetary policies advanced
economies have pursued since the financial crisis struck.
"The IMF is eager to adopt a prescriptive approach and to
advise countries on how to liberalize and manage capital flows.
However, the institution's track record in this area is far from
stellar," said Paulo Nogueira Batista, IMF executive director
for Brazil and 10 other countries in Latin America and Asia.
"The ongoing crisis has yet to have a full impact on the way
the IMF considers capital flows," Nogueira Batista said. "The
extent of the damage that large and volatile flows can cause to
recipient countries has not been sufficiently recognized."
Nogueira Batista said the IMF staff mostly played down the
responsibility of major advanced countries in destabilizing
surges in capital flows.
"The Fund has barely explored the effects of advanced
countries' monetary, financial and other policies on capital
flows -- the so-called push factors," he argued. "There is a
lack of evenhandedness."
An Indian finance ministry official said each country knows
best how to control its inflows and outflows, and that these
policies should not be based on recommendations from the IMF.
"This talk of capital controls came about because of loose
monetary policies by Europe and the U.S.," the official said.
"When they set about bringing in those monetary policies, they
did not care about the spillover effects it would have on the
rest of the global. And now the IMF wants us, in a way, to clean
up," the official added.
Vivek Arora, assistant director for the IMF's Strategy,
Policy and Review Department, said capital flows had increased
significantly in recent years and a clear mandate was needed to
guide countries' decisions on any controls.
"We intend for the view to be flexible, it is not set in
stone," he told a conference call. "The paper is not intended to
lay down a doctrine or to set in place a view once and for all.
On the contrary it represents our thinking at this time."
In a board statement, the IMF said most directors agreed
that capital flow measures should be used only in crisis
situations or when a crisis is imminent, and in combination with
sound macroeconomic policies and financial regulation.
It said countries that are the source of the capital flows
and those that are recipients of the money both have a
responsibility to ensure their policies are not disruptive.
The IMF said any effort to control capital flows should not
discriminate between money being brought in by residents and
money from outsiders. Some IMF directors disagreed.
"While most directors expressed a preference for avoiding
discrimination between residents and non-residents, a few
directors emphasized that when failure to differentiate between
residents and non-residents would render the policy ineffective,
residency-based measures may be justified," the IMF board said.