HONG KONG (Reuters) - Emerging economies will need capital controls to manage flows of “hot money” and ensure economic stability in the wake of the United States’ ultra-easy monetary policy, Nobel Prize-winning economist Joseph Stiglitz said on Thursday.
Some emerging countries, such as Brazil and Thailand, have implemented some capital control measures to restrict a huge influx of liquidity, especially since the United States unleashed a second round of quantitative easing.
“Right now we’re in a very difficult period, and one that’s getting more difficult because a fraction of the world has moved to a system with capital controls,” Stiglitz told a news conference.
“That will mean, almost inevitably, that we are going to be moving into a new global regime in which we will have all kinds of impediments on the flows of capital, of short-term capital,” he said at a real estate conference in Hong Kong.
Stiglitz, who won a Nobel Prize in economics in 2001, said the way to ensure economic stability was for countries to curb speculative inflows, but allow long-term investment that creates jobs.
Some countries could learn from China on controlling speculative inflows to stabilize its economy, now the world’s second-largest, he said.
“China has had capital controls on short-term flows that have worked, not perfectly, but have worked to stabilize these short-term flows. But at the same time, it’s been very open to long-term investments,” he said.
South Korea is preparing fresh measures aimed at curbing volatility in cross-border capital inflows, in addition to restrictions unveiled in June on currency derivatives trades by banks.
Stiglitz said it was worrying that some countries, such as India, had no plans for capital controls as speculative money was adding pressure to the economy and fuelling inflationary pressure in certain market segments, such as property.
“Where I do have a worry is countries like India, where they are debating how much intervention in the market we should have. And there are people who say in India we shouldn’t have capital controls, even though Brazil’s done it, China’s done it.”
On Hong Kong, even though the peg to the U.S. dollar has fanned inflationary pressure, the authorities could use other instruments to cool the markets, such as releasing more land to curb sky-high property prices.
“U.S. monetary policy made a very big mistake under Greenspan and Bernanke,” said Stiglitz, a professor at Columbia University. “Hong Kong should recognize that it is a very big mistake and use a full gambit of instruments to stabilize the market.”
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Editing by Chris Lewis