Turmoil in emerging markets is sparking calls for coordination and cooperation
Capital controls demonstrate how economic thinkers can make a 180-degree turnaround on policy. In the old era of the Washington consensus, anyone who called for capital controls was castigated but the Asian financial crisis and runs on other emerging markets began to change the conversation. Chile demonstrated that modest capital controls to attract long-term money and deter hot money could be effective.
On the weekend, a paper presented a Jackson Hole said emerging markets “can be adversely affected by large swings in investment, and must therefore develop tools to control credit flows or risk relinquishing any independent monetary policy”.
Emerging market leaders are becoming increasingly outspoken in the need for tools to control volatility.
Pravin Gordhan, South Africa’s finance minister, told the Financial Times in an interview that there is an “inability to find coherent and cohesive responses across the globe to ensure that we reduce the volatility in currencies in particular, but also in sentiment … There’s no doubt that the multilateral institutions that participate in, and often work for, and with, the G20 need to desperately try to come up with new answers and do some heterodox thinking to find a new framework which will enable us to embrace the current environment, create less volatility,” he said.
It’s too late for the current round of turmoil but with markets increasingly open to fast money and many investors crawling the world for yield, the decisions are critical. The main point is that volatility is the enemy of investment. Of course, it can be the friend of the FX trader.
