Political Risk Latin America Blog @PolRiskLatam

Guest post: capital controls should be Latin America’s last resort

Posted in News and Articles, Political Risk by politicalrisklatam on November 15, 2010

by Andrew Powell and Alessandro Rebucci of the Inter-American Development Bank for Beyond Brics, November 15th, 2010.

Latin America is attracting huge capital inflows. To slow currency appreciation and reduce the risk of overheating, some countries in the region are implementing economy-wide capital controls, such as taxes on foreign investments.

This approach has just been given tentative support at the Seoul G20 summit, but it is problematic because controls on capital inflows should not be used to manage exchange rates. Recent research by the Inter-American Development Bank indicates controls can be used to discourage speculative capital that may spur boom-bust cycles and financial crisis. But this does not apply to all countries. In economies that have a well-developed financial system capable of intermediating foreign capital effectively, capital controls can hamper growth and hurt productivity.

While a multilateral approach to global imbalances is required for a fundamental resolution, we believe there is more that can be done to deal with the collateral damage triggered by the swell of capital. (continue reading… )


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