- Owen Evens, and Peter Quirk
- Published Date:
- October 1995
Issues relating to the movement of capital among countries have become central to the IMF’s role, as embodied in its Articles of Agreement, in the international monetary system. During the last biennial review of its surveillance activities concluded in April 1995, the IMF’s Executive Board agreed that financial market and capital account issues deserved more attention by the IMF and amended the 1977 surveillance decision to take into account more explicitly the role of capital flows.1 The Madrid Declaration of the Interim Committee of the IMF in October 1994 welcomed the growing trend toward currency convertibility and encouraged member countries to remove impediments to the flow of capital. These and other developments in the international exchange and payments system call for a review of the IMF’s potential role in monitoring capital account restrictions and encouraging capital account liberalization.2 This paper reviews developments and issues relating to capital account convertibility by IMF members and the implications for IMF policies and jurisdiction.
For the purposes of this paper, capital account convertibility refers to freedom from exchange controls—quantitative controls, taxes, and subsidies—applicable to transactions in the capital and financial accounts of the balance of payments. Discussions of currency convertibility have focused on these forms of capital control, although restrictions are often imposed on real (underlying) transactions, for example, on inward foreign direct investment. Restrictions on underlying aspects of the transactions are excluded from the definition of capital account convertibility for the purposes of this paper. The concept of capital controls employed in this paper also does not include limits on foreign exchange exposure placed for prudential purposes or domestic monetary or fiscal measures that do not have a direct and differential impact on foreign exchange transactions.
The paper is organized as follows: Section II summarizes the main issues arising from the experiences of industrial and developing countries with capital account liberalization and examines the IMF’s treatment of capital controls in its surveillance, use of IMF resources, and technical assistance activities. General issues relating to extending the IMF’s role in promoting capital account liberalization are examined in this section. The remaining sections discuss specific experiences and issues relating to capital account liberalization. Section III summarizes industrial countries’ experiences with capital account liberalization, while Section IV reviews developing countries’ experience. These sections also provide a detailed exposition of IMF treatment of the issue. Section V outlines existing multilateral frameworks for capital account liberalization, and Section VI provides a survey of the capital controls currently in existence in developing countries. Finally, Section VII presents case studies of recent experiences with capital controls in four member countries (Chile, Colombia, Malaysia, and Venezuela).
That decision, with its subsequent amendments, elaborates the principles and procedures for the IMF’s surveillance over its members’ exchange rate policies. See International Monetary Fund, Selected Decisions and Selected Documents of the International Monetary Fund, Nineteenth Issue (Washington, 1994).
For a discussion of recent developments in the international exchange and payments system, see International Monetary Fund, Issues and Developments in International Exchange and Payments Systems, World Economic and Financial Surveys (Washington, April 1995).
Note: This section was prepared by Roger Nord, Mark O’Brien, Peter J. Quirk, and Kal Wajid. It addresses the main is-sues and draws upon the remainder of the paper, and therefore reflects the work of the other authors in the project.