Institute for Policy Studies
As the global economy descends further into crisis, governments are searching their toolboxes for instruments to protect their people from financial volatility. A new report finds that U.S. trade and investment agreements with 52 countries have removed one tool that has proved effective in past crises: capital controls.
“The Obama administration has a tremendous opportunity to wipe away the relics of a failed policy agenda that turned our global economy into a financial casino,” says report author Sarah Anderson, director of the Global Economy Project at the Institute for Policy Studies. “Eliminating obsolete restrictions on capital controls is one important step.”
The report includes quotes in support of capital controls from numerous noted economists, including former IMF chief economist Kenneth Rogoff, who recently wrote that countries with stringent capital controls are less likely to suffer from the current financial crisis than those completely open to international capital markets.
KEY REPORT FINDINGS:
U.S. Web of Capital Control Limits: Although many countries have used capital controls effectively to address financial market volatility, 52 national governments lack the power to control money flows across their borders as the result of U.S. trade pacts or bilateral investment treaties.
IMF Learned from Asian Crisis, U.S. Didn’t: The International Monetary Fund abandoned its blanket opposition to capital controls after some countries used this tool to avoid the worst effects of the Asian financial crisis that erupted in 1997. The U.S. government forged ahead, initiating agreements restricting capital controls with 22 more countries. Such restrictions are also in the pending U.S.-Colombia Free Trade Agreement.
Investors Can Sue for Compensation: Countries that violate these restrictions face potentially expensive lawsuits by foreign investors. In the supra-national arbitration tribunals that handle such cases, there’s no public accountability, no standard judicial ethics rules, and no appeals process.
Policy Handcuffs are Inherited: Of the 52 leaders who are now bound to such agreements, only 13 were in office at the time their country’s agreement was signed. In Bolivia, Ecuador, and several other countries, government leaders are working to develop alternative models for governing international investment and finance.
Opportunities under new U.S. Administration: President Barack Obama has committed to revising the investment rules in U.S. free trade agreements, along with other proposed trade policy reforms. The IPS report lays out five key opportunities for change, including renegotiating trade agreements and bilateral investment treaties, rolling back World Trade Organization commitments on financial deregulation, and reforming World Bank and IMF policies.
According to report author Anderson, “It’s critical that policymakers not only eliminate capital control restrictions, but also commit to building a new global framework that allows governments to play responsible roles in ensuring that foreign investment and finance support social goals.”