3.7 Tratamiento de la información
3.7.5 Factor de suavización BETA (β)
supra .
supra supra .
Country Experience supra Id
Id Id
Why Do Countries Use Capital Controls? supra .
capital.2 5 0 This problem can be illustrated in the Chilean experience in the late 1970s. Chile allowed the free capital inflows and was able to attract a large amount of capital. The banking system, with low supervision from the government, accumulated bad loans which was one of the reasons for the big recession that followed the 1980’s debt crisis.2 5 1 This is in addition to the
prudential reasons.2 5 2
Argentina is another example. In the 1990s, Argentina followed the model set by the international financial institutions in terms of privatisation and liberalization of financial
markets. Large amounts of capital inflows went to Argentina.2 5 3The country was considered a model in applying the neo-liberal prescription of the Washington Consensus. However, services provided by foreign investors who took the public services’ privatised companies, fell short of providing basic needs.2 5 4 Financial crisis erupted. Foreign investment failed to provide and sustain the growth and development needs of Argentina.2 5 5 Part of the reason had to do with the inefficiency or absence of governmental institutions capable of dealing with foreign investment and able to secure that foreign investment would contribute to the growth and development of the host country.2 5 6 Thus, the theoretical advantages that liberalizing capital movements will lead to advancing the domestic financial sector and accordingly decreasing the volatility seems to be realized only in developed countries which have institutions and market capable of benefiting from and sustaining capital movement.2 5 7
In addition, capital controls on inflows are used to minimize the need to use sterilization (and other monetary tools like fiscal policy) and to avoid making adjustments.2 5 8 Governments
usually utilize two economic policy tools for countering the negative effect of capital inflows.2 5 9 The first is sterilization, which “principally refers to the use of open market operations by the
central bank”for the purpose of decreasing the undesirable effect of capital inflows.2 6 0 It is an
250Johnston & Tamirisa,
n 247, at 13.
251
McKnight, n 153, at 879.
252
Johnston & Tamirisa, n 247, at 13.
253Lothian & Pistor,
n 55, at 112. 254 . 255 . at 113. 256 . 257Prasad et al., n. 4, at 9. 258 Ariyoshi, , n. 207, at 6. 259 McKnight, n 153,876. supra . supra . supra . supra . Id Id Id supra
Country Experience supra supra .
operation where the national central bank sells securities dominated in the local currency to reduce the capital inflows effect on the country’s money supply. 2 6 1 The sterilization aims at reducing money supply. A government may also issue bonds to absorb the excess of money.2 6 2 However, this can prove to be an expensive operation for the government due to the difference between the cost of the bonds and the revenue from foreign assets.2 6 3 Moreover, sterilization may lead to higher interest rate and result in more capital inflows benefitting from the higher interest rate, which exacerbates the problem.2 6 4
The second method is fiscal policy. Fiscal policy entails hard, political decisions for
governments, which undermine its usefulness.2 6 5 In short, these economic tools may not be sufficient to halt the negative effect of large capital inflows.2 6 6
Capital controls are used to halt short-term capital inflows and increase the maturity thereof. A substantial amount of short-term capital inflows into a developing country can carry many risks. These flows are volatile and reversible, which may cause currency depreciation and collapse of the economy.2 6 7 This stems from the “maturity transformation” characteristic of capital
markets.2 6 8
“Maturity transformation” refers to the fact that lenders want to have more liquid investment to be able to liquidate rapidly in case of risks or for more profitable opportunities, while borrowers
want to have longer term liabilities.2 6 9 Financial institutions like banks come as intermediaries to accommodate the conflict of interests between borrowers and lenders.2 7 0 They usually do so by diversifying and using the “law of large numbers”.2 7 1 They rely on the assumption that not all
customers will desire to withdraw all their money at the same time.2 7 2 They accordingly keep
260 . 877. 261 Ulan, n 217, 253. 262McKnight, n 153, 877. 263Ariyoshi, , n. 207, at 6. 264 McKnight, n 153, 877 ; Ariyoshi, , n. 207, at 6. 265 McKnight, n 153, 877-878. 266 . 878.
267Jones & Kimmis,
n 90, at 161. 268 Cooper, n 16, at 100. 269 . 270 . 271 . 272 Id. Id supra . supra .
Country Experience supra
supra . Country Experience supra
supra . Id supra . supra . Id Id Id
only the amount they expect that will be claimed liquid and lend the rest for terms longer than what their lenders want.2 7 3
This “maturity transformation” characteristic is not realized only in the banking system but also in an efficient capital market where securities holders can liquidate their securities in the
secondary market while issuers use the raised funds to invest for a longer term.2 7 4However, one of the often occurring characteristics of a liberalized financial system in developing countries is the sudden increase of claims to liquidity that exceed the financial system to provide which causes financial crisis.2 7 5 Surge of capital outflows usually follows. This destabilizes the
macroeconomic tools, causing fluctuations in exchange rates and the assets’ prices.2 7 6 This is accompanied by unemployment and poverty; 2 7 7 “new borrowing becomes more difficult, old loans become impossible to roll over, and aggregate demand slumps, wasting productive resources and lowering real income”2 7 8 ; resulting in all kinds of social, economic and political problems that may threaten a country’s stability. This is one of the consequences of the
microeconomic advantages to foreign investors of liquidity and free capital movement which
negatively affect the macroeconomics of the host country.
Capital controls are also traditionally used to manage balance of payment and
macroeconomics.2 7 9 A country with a balance of payment problems usually uses capital controls
to restrict capital outflows.2 8 0 From a macroeconomic perspective, capital controls are used to guard against destabilizing short-term capital flows and related instability in exchange rates, “asymmetric information problems”, and the investors’ herd behaviour.2 8 1
Balance of payment justification for using capital controls is sometimes explained in terms of reducing the cost of domestic debt servicing to finance domestic projects when national savings fall short from while also keeping domestic interest rate low.2 8 2 In the same vein, capital
273 . 274 . 275 . 276
Jones & Kimmis, n 90, at 161.
277 . 278
Cooper, n 16, at 100.
279
Johnston & Tamirisa, n 247 , at 13.
280 . 281 . at 14. 282 . at 13. Id Id Id supra . Id supra . supra . Id Id Id
controls are used to reduce the effect of the difference between domestic and international interest rates while decreasing the pressure on exchange rates.2 8 3 This mode is criticized, since employing capital controls for lowering interest rates would, arguably, hurt existing investors in national assets and would decrease national saving. 2 8 4It is submitted, however, that the change in domestic interest rates will not have substantial effects on capital flows in case of effective capital controls in place.2 8 5 Nevertheless, this wedge may encourage avoidance thereof, and the effectiveness of capital controls will depend on the difference between the costs of and the profit from avoidingthem.2 8 6
Another rationale forwarded is the desire to keep a level of “monetary and exchange rate policy autonomy” towards achieving national targets and lessening attacks on domestic currency exchange rate. 2 8 7 Capital controls may be used to preserve the exchange rate system. Any exchange rate system needs to regulate the national banking system’s short-term foreign exchange liabilities. 2 8 8 The foreign exchange market is a huge market and its turnover by far exceeds trade in goods and services. The trading in the foreign exchange market in one day exceeds the total global central banks reserve.2 8 9 Regulation may include imposing exchange controls on short-term capital inflows. 2 9 0 The movement of short-term capital can drain international reserves, causing considerable instability in interest rates, which could potentially destroy the fixed exchange rate regime.2 9 1 A country that wants to keep a fixed exchange rate
regime may use capital controls for that purpose.2 9 2 Capital controls “lengthen the period of
time for which a currency peg can be maintained given the stance of monetary and fiscal policies…” 2 9 3
283Ariyoshi,
, n. 207, at 15.
284Johnston & Tamirisa,
n 247, at 13. 285Ariyoshi, , n. 207, at 5. 286 . 287
Johnston & Tamirisa, n 247, at 13. (emphasis omitted); Ariyoshi, , n. 207, at 5. 288McKinnon,
n 137, at 202.
289William R. White, , 1999 Colum. Bus.
L. Rev. 365, at 365 (1999).
290
McKinnon, n 137, at 202.
291Johnston & Tamirisa,
n 247, at 14.
292
.; Macey & Colombatto, 68, at 397.
293
Eichengreen, n 2, at 104.
Country Experience supra supra . Country Experience supra Id
supra . Country Experience supra
supra .
The Tobin Tax: A Solution to Today’s International Monetary Instability? supra .
supra .
Id supra n.
Recent experiences suggest that if there is capital mobility, it is not feasible to have fixed but
adjustable rates.2 9 4 It is argued that free capital movement also does not fit with floating
exchange rates in most countries, other than in developed countries like the US and the EU, that do not have the same advanced capital markets nor as diversified an economy.2 9 5 Speculative
attacks on any currency, even developed countries’ currencies, can destroy the macroeconomic policy of any country.2 9 6
In addition to developing countries’ currency crises like Mexico in 1994, the 1990s saw currency crises in developed countries, such as in Italy and the UK in 1992, France in 1993, and Spain in 1995.2 9 7 Such speculative attacks led Sweden to change its policies in 1992 after failing to
defend its currency begs.2 9 8 The United States was not immune from the effect of exchange rate changes either. Between 1994-1995, the US had to change some of its strategic targets as the dollar was deteriorating against the Yen. 2 9 9 Capital controls can be used as a temporary tool to
avoid such consequences.3 0 0
Capital controls can be used to preserve the stability of the financial system by restricting national entities from assuming substantial foreign exchange liability, or by changing the nature of liabilities of financial institutions from short-term to long term ones.3 0 1 Banks and other
domestic financial actors may have an incentive to borrow for a short-term foreign exchange to benefit from differences in interest rates in cases of begged or fixed exchange rates. 3 0 2 The fixed or begged exchange rate provides a kind of implied guarantee.3 0 3 In addition, some research has
found that pegging the exchange rate in order to halt inflation distorts capital market. 3 0 4 It is argued that a pegged exchange rate, coupled with domestic inflation, leads to increase in capital inflows since foreign investors stand to gain more than national investors. An established
294
Geoffrey Wood, , Sir Joseph Gold Memorial Series International Monetary and Financial Law Upon Entering the New Millennium a Tribute to Sir Joseph and Ruth Gold, (ed. Joseph J. Norton and Mads Andenas, The British Institute of International and Comparative Law, 2002); Cooper, n 115.
295 Cooper, n 115. 296 Eichengreen, n 2, at 99. 297 . 298 . 299 . 300
Johnston & Tamirisa, n 247, at 14.
301 . at 15. 302McKinnon, n 137, at 202.; Ariyoshi, , n. 207,at 5. 303 Ariyoshi, , n. 207, at 5. 304 McKinnon, n 137, at 201.
The IMF in a Changing World in
supra . supra . supra . Id Id Id supra . Id
supra . Country Experience supra
Country Experience supra supra .
exchange controls can solve this problem. 3 0 5 This is more acute in developing countries where interest rates are usually higher than those in developed countries. This gives banks and other lenders in these countries more incentive to borrow foreign exchange from developed countries
to benefit from the difference. 3 0 6
In addition, when the government uses interest rates and exchange rates concurrently in pursuing
contradictory internal and external balance targets, capital controls can be used to resolve this conflict of targets.3 0 7Controls on outflows, in general, aims at preventing currency depreciation without resorting to tough measures like pursuing restrictive monetary policy.3 0 8 In contrast,
capital controls on capital inflows are used to prevent a currency appreciation as a result of surge in capital inflows, while keeping national “monetary conditions” under control.3 0 9
Using capital controls for prudential reasons is justified on the grounds that international transactions inherently involve different kinds of risk than that of national transactions.3 1 0 To allow the trade and listing of foreign securities, different sets of conditions are required other
than just those required from national securities.3 1 1This is due to the possible existence of different regulatory and accounting systems, and difficulties relating to enforcement in other jurisdictions.3 1 2
Many problems are associated with the use of capital controls, which relate to their effectiveness and efficiency. First, it is asserted that capital controls cause distortions, create corruption, and are almost always (after a certain time) evaded or avoided.3 1 3
305 . 306 . at 203 -204 (2002). 307
Johnston & Tamirisa, n 247, at 13-14.
308 . at 14. 309 . 310 I at 15. 311 . 312 313
Rogoff, n 166; Reuven Glick & Michael Hutchison,Capital Controls and Exchange Rate Instability in Developing Economies,at 3 (Federal Reserve Bank of San Francisco Working Paper PB00-05, 2002) available at http://www.frbsf.org/publications/economics/pbcpapers/2000/pb00-05.pdf.