Global Capital Rules

International organizations, including the International Monetary Fund, are gradually backtracking on complete openness and mobility for foreign finance and giving grudging support to taxes and other means to tame cross-border financial flows. The IMF “has acknowledged the reality that financial globalization can be disruptive – inducing financial crises and economically adverse currency movements,” writes Dani Rokrik, Harvard professor of international political economy, for Project Syndicate. He explains that the EU made capital controls illegal in 1992 and the OECD required open finance of its members, too. Emerging economies like Mexico and South Korea were whipsawed by the lack of controls, Rodrik notes. Developed countries blamed emerging economies for a lack of internal controls – until the recent global credit crisis struck the most powerful economies of the world. “It became clearer that the problem lay with instability in the global financial system itself – the bouts of euphoria and bubbles, followed by the sudden stops and sharp reversals that are endemic to unsupervised and unregulated financial markets,” Rodrik explains. Diverse regulations are emerging, which encourage arbitrage. Rokrik recommends that regulators develop a fair, uniform, organized set of rules for cross-border financing. – YaleGlobal