“… I do not think that the imposition of country-by-country capital controls is the best way to eliminate the destructive macroeconomic impacts of rapid inflows or withdrawals of financial capital.It seems to me that this would impose a serious problem for the Third World as follows:
If we consider that the only productive role of the financial markets is to advance the social welfare of the citizens – that is, advancing public purpose – then it is likely that a whole range of financial transactions, which drive cross-border capital flows, should be made illegal.
Capital inflows that manifest as FDI in productive infrastructure are relatively unproblematic. They create employment and physical augmentation of productive capacity which becomes geographically immobile.
However, financial flows that are speculative (especially short-term flows) and not connected with the real economy are unproductive and should be declared illegal. You may consider this is an extreme direct control. However the policy should be introduced on a multi-lateral basis spanning all nations rather than being imposed on a country-by-country basis. The large first-world nations should take the lead. I don’t see that leadership being forthcoming.”
Bill Mitchell, “Are Capital Controls the Answer?,” Billy Blog, April 28, 2010.
(1) with a large volume of speculative capital movements banned, this will reduce capital account surpluses, and probably cause balance of payments crises in the Third World as trade deficits cannot be financed, andThat would require a total reform of the international payments system, including the World Bank and IMF, which would have to provide such foreign exchange for countries that need it.
(2) this will mean MMT-style fiscal policies will not be able to be pursued in the Third World, and there will also be a serious crisis of development in the Third World, and some new mechanisms will have to be designed to provide foreign exchange for economic Third World development.