Today, the IMF released a staff position paper entitled “Capital Inflows: The Role of Controls.” The paper represents a substantial reversal the IMF’s previous opposition to capital control measures. The staff of the IMF, which has been a strong advocate of free trade policies, acknowledge in the paper that emerging market economies (EMEs) with capital controls in place were less impacted by the financial crisis than other EMEs without such measures. Specifically, the authors note that IMF empirical data “suggests that controls aimed at achieving a less risky external liability structure paid dividends as far as reducing financial fragility.”

The authors recognize in part that, as the global economy begins to stabilize, the flow of capital is reverting back to EMEs. Further, the authors note that such flows, and capital mobility generally permit countries with “limited savings to attract financing for productive investment projects, foster the diversification of investment risk, promote trade, and contribute to the development of financial markets.” The economists who prepared the paper compare the benefits generated from the cross-border flow of capital to the benefits derived from free trade.

The IMF paper cautions, however, that deciding how best to handle “surges in inflows that may pose both prudential and macroeconomic policy challenges.” While such measures may include adopting policies related to fiscal, monetary and capital controls, the paper stresses that the appropriate policy will depend on each individual countries economic condition and circumstances.

A key conclusion of the paper is that, if a country's economy continues to stabilize and if certain factors are present “then [the] use of capital controls—in addition to both prudential and macroeconomic policy—is justified as part of the policy toolkit to manage inflows.” Further, the authors emphasize that “[s]uch controls, moreover, can retain potency even if investors devise strategies to bypass them, provided such strategies are more costly than the expected return from the transaction: the cost of circumvention strategies acts as 'sand in the wheels.'”