Capital controls are back in fashion. This column discusses new firm-level evidence from Brazil showing that capital controls segment international financial markets, reduce external financing, and lower firm-level investment. They disproportionately affect small, non-exporting firms, especially those more dependent on external finance. This suggests that macro-finance models focusing on aggregate variables are missing an important dimension by abstracting from firm-level heterogeneity.
Laura Alfaro, Anusha Chari, Fabio Kanczuk, 22 January 2015
Otaviano Canuto, Cornelius Fleischhaker, Philip Schellekens, 11 January 2015
While Brazil has become one of the largest economies in the world, it remains among the most closed economies as measured by the share of exports and imports in GDP. This column argues that this cannot be explained simply by the size of Brazil’s economy. Rather it is due to a reliance on domestic value chain integration as opposed to participation in global production networks. Greater trade openness could produce efficiency gains and help Brazil address its productivity and competitiveness challenges.
Patricia Ellen, Jaana Remes, 12 July 2014
Brazil has grown rapidly and reduced poverty over the past decade, but it has grown more slowly than other emerging economies and its income per capita remains relatively low by global standards. This column points out that sectors of the Brazilian economy that have been opened up to international competition have outperformed those that remain heavily protected. Deeper integration into global markets and value chains could provide competitive pressures that would improve Brazil’s productivity and living standards.
André Carlos Martínez, Aldo Musacchio, Martina Viarengo , 09 July 2014
Institutions are known to play a powerful and enduring role in countries’ divergent levels of economic development. This column presents evidence that institutions matter for within-country inequality, too. In Brazil, changes in export prices and export tax revenues led to an increase in education spending in states that experienced commodity booms, which increased the number of schools and improved educational outcomes such as literacy rates. However, the effect was limited in states where slavery was predominant in colonial times.
Paolo Giordani, Michele Ruta, Hans Weisfeld, Ling Zhu, 23 June 2014
Capital controls may help countries limit large and volatile capital inflows, but they may also have spillover effects on other countries. This column discusses recent research showing that inflow restrictions have significant spillover effects as they deflect capital flows to countries with similar economic characteristics.
Nauro F. Campos, 13 June 2014
The 2014 FIFA World Cup is upon us. This column argues that there will be plenty of partying, but also plenty of protests fuelled by the gross mismanagement and limited economic benefits from hosting the Cup. Stadia may be ready, but much planned infrastructure has already been abandoned. Indeed, rent-seeking may be one reason nations bid for the Cup. Since the returns to transportation infrastructure are higher in poor countries, the international community should work to stamp out corruption so that poor countries can continue to host mega-events like the World Cup.
Kristin Forbes, Michael W Klein, 24 December 2013
Government interventions to control capital flows and reduce exchange-rate volatility have long been controversial. The Global Financial Crisis has made the debate more urgent. This column discusses recent research that evaluates such policies against the counterfactual of no intervention. Depreciations and reserve sales can boost GDP growth during crises, but may also substantially increase inflation. Large increases in interest rates and new capital controls are associated with reductions in GDP growth, with no significant effect on inflation. When faced with sudden shifts in capital flows, policymakers must ‘pick their poison’.
Márcio Garcia, 25 September 2013
The recent reversal of capital flows to emerging markets raises the question of whether and how to intervene in currency markets. Brazil’s central bank has intervened heavily, spending more than $50 billion and promising to double that by the end of the year. However, almost all of that intervention has taken place in onshore derivative markets that settle in real. This column argues that such interventions can be effective, but that central banks must stand ready to use their foreign-exchange reserves if necessary.
Anders Åslund, 04 September 2013
Emerging markets are under pressure. This column argues that this is not a mere headwind but that the BRICs’ party is over. Their ability to get going again rests on their ability to carry through reforms in grim times for which they lacked the courage in a boom.
Nauro F. Campos, 23 July 2013
After decades of macroeconomic stability, structural reforms and declining inequality, mass political protests unexpectedly erupted in Brazil. This column reports new empirical evidence on protests in Brazil over the long-run to shed some light on recent events. It argues that they were driven by three main factors: corruption in public services delivery, political ineptitude in the run-off to major international events, and the political-economy effects of the electoral cycle.
Márcio Garcia, 01 March 2013
Did inward capital controls work for Brazil? This column assesses the evidence, concluding that capital controls are desirable if they help avoid excessive debt and asset price bubbles, a risk given the appetite of foreign investors towards Brazilian assets. That said, policymakers needs to complement capital controls with foreign savings in order to enable an investment rate compatible with sustaining GDP growth.
Michael W Klein, 17 January 2013
Capital controls are back in vogue. This column argues that we should distinguish between episodic controls (gates) and long-standing controls (walls). Research shows that the apparent success of 'walls' in China and India tells us little about the consequences of capital controls imposed or removed in countries like Brazil and South Korea, as circumstances change. Walls and gates are fundamentally distinct, and policy debate needs to take into account these differences.
Christian Daude, 10 December 2012
Latin American central banks are facing new challenges in the form of unprecedented levels of uncertainty and exchange rate appreciation pressures. This column, focusing on Brazil, Chile, Colombia, Peru and Mexico, argues that there is an overestimation of the potential output in several Latin American economies, a lack of an explicit policy direction from central banks, and lacklustre frameworks for macroprudential policy. Although inflation targeting has served countries in Latin America well, significant risks remain.
Yothin Jinjarak, Ilan Noy, Huanhuan Zheng, 22 November 2012
Capital controls are experiencing a renaissance, due in part to the current financial crisis. But do they really have an effect? This column assesses the Brazilian experience, arguing that policies may be more politically or electorally convenient than effective in any economic sense. It seems policymakers understand capital controls’ relative economic impotence, but nevertheless feel forced to resort to adopting them.
John Williamson, Olivier Jeanne, Arvind Subramanian, 11 June 2012
Do we need international rules for capital controls? This column looks at the different regimes in countries such as Brazil and China and argues that we do.
Oleg Itskhoki, Marc Muendler, Stephen Redding, Elhanan Helpman, 20 May 2012
What is the effect of trade on inequality? This column presents a unique study examining wage inequality in Brazil after liberalisation. Starting from a closed economy, the column finds that wage inequality will initially rise as only some firms take advantage of the new opportunities. But as trade costs continue to fall and more firms start to trade, wage inequality peaks and begins to fall back.
Joshua Aizenman, Daniel Riera-Crichton, Sebastian Edwards, 14 January 2012
Last year’s surge in commodity prices was a reminder, if we needed one, of the problems caused by terms-of-trade volatility in emerging economies. This column looks at the real exchange rate adjustments to commodity terms-of-trade shocks in the region exposed to the highest volatility – Latin America. It finds that active reserve management not only lowers the short-run impact of shocks, but also substantially reduces real exchange rate volatility.
Helmut Reisen, Jean-Philippe Stijns, 12 July 2011
Many discussions of official development assistance express concerns about China's growing investment and involvement in Africa economies. This column, summarizing the 2011 African Economic Outlook report, emphasizes the benefits of emerging economies' increasing presence in Africa, including the opening of African policy space due to Western donors' decline in relative influence.
Anne Krueger, 28 April 2011
The Doha Round is in peril. This essay argues that if the impasse is intractable, world leaders face three choices: to quickly finish the low-ambition package on the table, to explicitly terminate the Doha Round, or to let it die a slow death. It says the last option would be by far the worst – even if it is the most likely.
Philip Levy, 28 April 2011
The Obama Administration seems to view Doha delay as a minor issue since they view the export gains from the current package as small. This column argues that this calculation is based on a false premise that the status quo would continue even if the Round dragged on for years. Nations respect the WTO’s Dispute Settlement Mechanism verdicts in order to remain as members in good standing; this allows them to reap the benefits of the WTO as a negotiating forum. If the WTO collapses as a negotiating forum, nations may move towards a crass calculus that assesses verdicts only on the basis of the threats that back them. This would be a deeply regrettable move away from a rules-based global trading regime.