International Capital Flows and the Emerging Markets: Amending the Rules of the Game?

Recently, and partly as a result of the currency crises in emerging markets, a broad debate on reforming the international financial system has begun. Talk of a “new financial architecture” abounds, and academics, financiers, and politicians have offered blueprints for reforming existing institutions. Some have talked of creating a global lender of last resort, while others have argued that it is high time to abolish the International Monetary Fund (IMF). It is becoming increasingly apparent, however, that political considerations will stand in the way of true change, and it is highly likely that in the next few years we will see, at most, a modest reform of the IMF and of the other major multilateral institutions. However, we are also likely to see some important changes in exchange rate arrangements, as well as in country-specific rules governing capital mobility. Policy discussions have begun to concentrate on the following issues: (a) the conjecture that optimal exchange rate regimes are characterized by either a clean float or an institutionally rigid system, à la dollarization (Calvo 1999; Edwards 1999a); and (b) the role of capital controls as a way of reducing an emerging country’s vulnerability to speculation and currency crises. Most proponents of controlling capital mobility have argued that a system aimed at limiting short-term—or speculative—capital movements would be beneficial to emerging countries. Almost invariably, the supporters of this policy refer to Chile’s experience with controls on capital inflows as an illustration of the merits of this system. Joseph