Evaluation Report

Title Page

Evaluation Report

The IMF’s Approach to Capital Account Liberalization


© 2005 International Monetary Fund

Production: IMF Multimedia Services Division

Figures: Wendy Arnold

Typesetting: Alicia Etchebarne-Bourdin

Cataloging-in-Publication Data

The IMF’s approach to capital account liberalization: evaluation report/[prepared by a team headed by Shinji Takagi and including Jeffrey Allen Chelsky … [et al]—[Washington, D.C.]: International Monetary Fund, 2005.

p. cm.

Includes bibliographical references.

ISBN 9781589064157

1. Capital movements. 2. International Monetary Fund—Evaluation. I. Takagi, Shinji, 1953– II. Chelsky, Jeffrey Allen. III. International Monetary Fund, Independent Evaluation Office.

HG3891.I43 2005

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  • Foreword

  • Abbreviations and Acronyms

    • The IMF’s Approach to Capital Account Liberalization

  • Executive Summary

  • 1 Introduction

    • The Scope of the Evaluation

    • Sources of Evidence

    • Organization of the Report

  • 2 General Policy and Analysis

    • The Legal Basis

    • General Operational Approach

    • Multilateral Surveillance

    • Assessment

  • 3 Advice to Member Countries, 1990–2002

    • Capital Account Liberalization

    • Macroeconomic and Structural Policies to Manage Capital Inflows

    • Temporary Use of Capital Controls

    • Assessment

  • 4 Ongoing Country Dialogue on Capital Account Issues

    • Capital Account Liberalization

    • Temporary Use of Capital Controls

    • Assessment

  • 5 Major Findings and Recommendations

    • Major Findings

    • Recommendations

  • Boxes

    • 1.1. The Debate on the Benefits of Capital Account Liberalization

    • 1.2. Effectiveness of Market-Based Capital Controls: Evidence from Chile

    • 1.3. Capital Account Liberalization in Indonesia and Korea

    • 2.1. The Proposal to Amend the Articles of Agreement

    • 2.2. Mexico: Capital Account Liberalization and the Crisis of 1994–95

    • 2.3. Chile: The IMF’s Views on the Use of Market-Based Controls on Inflows

    • 3.1. Latvia

    • 3.2. Outflow Controls in Thailand (1997) and Malaysia (1998)

    • 4.1. India

    • 4.2. Technical Assistance

    • 4.3. The IMF’s “Integrated” Approach to Capital Account Liberalization

  • Figures

    • 1.1. Private Capital Flows to Developing Countries

    • 1.2. Countries with Capital Controls

    • 1.3. Countries with Capital Controls

    • 1.4. Average Capital Account Openness in 12 Sample Countries

    • 2.1. Net Capital Inflows to Developing Countries

    • 3.1. Fiscal Performance and the IMF’s Fiscal Policy Advice in Selected Countries, 1990–2002

    • 3.2. IMF Support for Exchange Rate Flexibility in Selected Countries, 1990–2002

  • Tables

    • 2.1. Notable Events Affecting Capital Account Issues, 1991–2004

    • 3.1. The Nature of the IMF’s Advice on Capital Account Liberalization in Selected Countries

    • 3.2. The IMF’s Advice on Managing Large Capital Inflows, 1990–2002

    • 3.3. Fiscal and Other Macroeconomic Indicators in Selected Countries with Large Capital Inflows, 1990–2002

    • 3.4. The IMF’s Position on Temporary Use of Capital Controls, 1991–2001

    • 4.1. Policy Environments for Capital Account Liberalization in Selected Countries

  • Appendixes

  • 1 A More Detailed Assessment of Some Country Cases

    • The Czech Republic: Liberalization in a Transition Economy

    • Colombia: Market-Based Controls on Inflows

    • Venezuela: Use of Capital Controls on Outflows

    • Tunisia: Gradual Liberalization

  • 2 Staff Research

    • Early Work on Capital Controls and Capital Flow Management

    • Later Work on Capital Controls

    • Work on Sequencing

    • More Recent Work

  • 3 Public Communications

  • 4 Cross-Border Capital Transactions and Capital Account Openness in Selected Countries, 1989–2002

  • 5 Capital Account Openness in 12 Sample Countries, 1990–2002

  • 6 List of Interviewees

  • Appendix Box

    • A1.1. Hungary

  • Appendix Figures

    • A1.1. Czech Republic: Capital Account Openness and Net Private Capital Inflows

    • A1.2. Colombia: Capital Account Openness and Net Private Capital Inflows

    • A1.3. Venezuela: Capital Account Openness and Net Private Capital Inflows

    • A1.4. Tunisia: Capital Account Openness and Net Private Capital Inflows

  • Appendix Table

    • A1.1. Colombia: The Unremunerated Reserve Requirement, 1993–2000

  • References

    • Statement by the Managing Director, IMF Staff Response, IEO Comments on Management/Staff Response, and Summing Up of IMF Executive Board Discussion by the Acting Chair

  • Statement by the Managing Director

  • IMF Staff Response

  • IEO Comments on Management/Staff Response

  • Summing Up of IMF Executive Board Discussion by the Acting Chair

The following symbols have been used throughout this report:

– between years or months (e.g. 2003–04 or January–June) to indicate the years or months covered, including the beginning and ending years or months;

/ between years (e.g. 2003/04) to indicate a fiscal (financial) year.

“Billion” means a thousand million.

Minor discrepancies between constituent figures and totals are due to rounding.

Some of the documents cited and referenced in this report were not available to the public at the time of publication of this report. Under the current policy on public access to the IMF’s archives, some of these documents will become available five years after their issuance. They may be referenced as EBS/YY/NN and SM/YY/NN, where EBS and SM indicate the series and YY indicates the year of issue. Certain other documents are to become available ten or twenty years after their issuance depending on the series.


This report reviews the IMF’s approach to capital account liberalization and related issues, drawing on evidence from a sample of emerging market economies over the period 1990–2004. The role of the IMF in capital account liberalization has been a topic of major controversy. An independent evaluation of the IMF’s advice on capital account issues is therefore both timely and appropriate.

The evaluation seeks to contribute to transparency by documenting what in practice has been the IMF’s approach to capital account liberalization and related issues and to identify areas where the IMF’s instruments and operating methods might be improved, in order to deal with capital account issues more effectively. The report deals not only with capital account liberalization per se but also with capital flow management issues, including particularly the temporary use of capital controls.

Capital account liberalization is an area where there is little professional consensus, making it difficult to evaluate the IMF’s policy advice against some universal set of criteria. Moreover, the IMF Articles of Agreement give the IMF only limited jurisdiction over the capital account, with the result that the IMF had no formal policy on most capital account issues during the period under review. For these reasons, the evaluation assesses the IMF’s actual approach to these issues, identifying what policy advice the IMF gave in the context of a specific country at a specific point in time.

The report begins by reviewing the IMF’s general operational approach and analysis as they evolved from the early 1990s into the early 2000s. It then assesses the IMF’s country work in terms of (1) its role in capital account liberalization during 1990–2002, (2) its policy advice to member countries on managing capital flows during the same period, and (3) its ongoing work on capital account issues in a group of emerging market economies during 2003–04. The report concludes by offering two broad recommendations. First, as noted in the original terms of reference, the evaluation does not seek to make a judgment on whether the Articles of Agreement should be amended to give the IMF an explicit mandate and jurisdiction on capital account issues, since this is an issue that goes well beyond the scope of the evaluation evidence. However, the report does conclude that greater clarity on the IMF’s approach to capital account issues is needed and makes a number of suggestions as to how this might be achieved. Second, the report supports greater attention by the IMF’s analysis and surveillance to the supply-side factors of international capital flows, a process that is already under way.

The report was discussed by the IMF Executive Board on May 11, 2005. In keeping with established practice, the report is being published as submitted to the Board, except for minor factual corrections. This volume also includes the response of IMF management and staff to the evaluation, the IEO response, and the Summing Up of the Board discussion.

David Goldsbrough

Acting Director

Independent Evaluation Office

The report was prepared by a team headed by Shinji Takagi and including Jeffrey Allen Chelsky, Edna Armendariz, Misa Takebe, and Halim Kucur. It also benefited from substantive contributions from Rawi Abdelal, Masahiro Kawai, David Peretz, Jai Won Ryou, and participants in a workshop held at the Institute for International Economics—William Cline, Morris Goldstein, Michael Mussa, Edwin Truman, and John Williamson. Administrative support by Annette Canizares, Arun Bhatnagar, and Maria S. Gutierrez, and editorial work by Ian McDonald and Esha Ray are gratefully acknowledged. The report was approved by David Goldsbrough, Acting Director of the IEO.

Abbreviations and Acronyms


American Depository Receipt


Annual Report on Exchange Arrangements and Exchange Restrictions (IMF)


Bangkok International Banking Facility


Collective action clause


Extended Fund Facility (IMF)


Economic and Monetary Union


Exchange Rate Mechanism (European Monetary System)


European Union


Foreign direct investment


Financial Sector Assessment Program (IMF and World Bank)


General Agreement on Trade in Services


General Agreement on Tariffs and Trade


Gross domestic product


Global Financial Stability Report (IMF)


International Capital Markets Department (IMF)


International Capital Markets Report (IMF)


Independent Evaluation Office (IMF)


International Monetary Fund


International Organization of Securities Commissions


Legal Department (IMF)


London interbank offered rate


Letter of Intent (IMF)


Monetary and Exchange Affairs Department (IMF)1


Monetary and Financial Systems Department (IMF)


Organization for Economic Cooperation and Development


Policy Development and Review Department (IMF)


Research Department (IMF)


Special drawing right (IMF)


Sovereign Debt Restructuring Mechanism


Stand-By Arrangement (IMF)


Technical assistance


United Nations Conference on Trade and Development


Unremunerated reserve requirement


World Economic Outlook (IMF)


World Trade Organization


Effective May 1, 2003, name was changed to Monetary and Financial Systems Department.