Odd Lots - Why the IMF Changed Its Views on Capital Controls

Episode Date: December 7, 2020

For years, the IMF was generally of the view that free trade was good, and that open capital flows were also good. But in recent years, the latter view has started to change. Increasingly the IMF, while continuing to promote openness, has viewed restricting the capital account for emerging markets as a useful tactical macro tool. On this episode of Odd Lots, we speak with Prakash Loungani and Sriram Balasubramanian of the IMF's Independent Evaluation Office on their examination of the IMF's work, and how its perspective has changed over the last several years. See omnystudio.com/listener for privacy information.

Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask, Alexa, play the Odd Lots podcast on Amazon Music. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthal. And I'm Tracy Allaway. So Tracy, evolution of economic thought is a big topic for us, especially this year. A lot of discussion about monetary policy, fiscal policy. One of the first. of our recurring themes, no doubt. Yeah. I mean, it feels like a lot of these conversations had begun even before 2020, but this year is kind of the one that makes everyone start taking them, or at least talking about them seriously. So things like modern monetary theory, once considered

very, very heterodox, are now, I mean, now you see certain U.S. politicians talking about it, the idea of a greater role for fiscal policy alongside money policy. There are a lot of, of standard thoughts that are being overturned or at the beginning of being overturned, maybe. Right. Some stage of evolution. We haven't really, I mean, we've done a little bit, but we haven't really taken this sort of theme of evolution, however, within the context of, say, emerging markets, or we haven't really done as much on it. We've done a little, actually, but not that much yet. Yeah. So emerging markets this year were pretty interesting, clearly under a lot of stress because these are the countries that are dealing with a huge

caseload of the virus, the coronavirus, and also dealing with the economic fallout of everything that's going on in the rest of the world. So it feels like they're sort of getting this double whammy of maybe not having as great health systems as a lot of the developed world, but still having to deal with the economic impacts. So, you know, back in March, remember, like EM looked like it was very much in trouble. Yeah. You know, I really do think, and it's not exactly what we're going to be talking about today, but I do think one of the themes from 2020 that's going to be interesting in retrospect

and with pretty important implications is whether various EMs have more policy flexibility that previously appreciated, whether it's their ability to do quantitative easing, whether it's their ability to run fiscal deficits. It's possible that after 2020, people might have. start to think that some EMs might have more space to engage in countercyclical policy than previously appreciated it. Oh, absolutely. And we're already sort of saying that because Indonesia, I mean, who would have thought a few years ago that Indonesia would be the first central bank to do direct financing? And in 2020, that's entirely possible. So we are seeing some emerging markets.

Yeah. So we are seeing some emerging markets experimenting with new types of policy. So another big question, of course, and this is something that, you know, is a constant theme in EM discussions relate to control of the capital account, limiting hot money or money coming in, coming out. The degree to which EMs should keep a tight leash on capital inflows and outflows is something that always gets debated and there's always sort of a. rethinking about what is the appropriate degree to which such things should be tightly controlled. Yeah. And I think, I mean, for years and years and years, it was pretty clear that the international political system, I guess, had a bias against capital controls. You know, they wanted liberalization of the current account. They wanted money to flow freely between countries. And we've seen at various points in time that that's not always in the best interest of the country itself. So, you know,

for instance, if you're in emerging market somewhere and suddenly you get this influx of hot money from abroad because people are looking for yield and they pour it all into your housing market or something like that, that might not actually be what you want at that particular moment in time and overheated housing market. So that's been an ongoing debate. And I think you're right. We're starting to see some discussion of it. 2020 again provides another sort of catalyst to look into this topic. Exactly right. Well, we have two very great guests.

I'm excited to chat with him about this topic. We're going to be speaking with Prokosh Lungani. He's assistant director and senior personnel manager in the IMF's independent evaluation office, well as Shuram, Balasubramanian, a senior research officer at the IEO and IMF. Excited about talking to both of them on this topic. They've both recently done work on this. Prakash, thank you very much for joining us. Thanks, Joe. It's great to be on the show with you and Tracy.

I've really enjoyed listening to your podcast. Oh, thank you. And Shuram, thank you as well. Hi, guys. How are you doing? Good to be on this podcast. Very kind, both of you to say, well, let's get started, Prakash. If you want to kick us off, you know, we talk about evolution of thought. But for those unfamiliar, I include myself in the category, just to be clear. but for those unfamiliar, what has been the sort of orthodox standard IMF view on how to think about capital control?

Okay, well, I don't want to take you too far back into history, but, you know, a pre-Orthodox view, actually around the time that the IMF was created, one espoused by Keynes and Harry Dexter White at the U.S. Treasury, was that you could have. have free trade, but you needed to actually have capital controls. So when the IMF was founded, the prevailing view was that you actually needed capital controls, that you really couldn't have the instability that the free movement of foreign capital might bring about. But then you had the Berlin Wall falling and capitalism was the only game in town. And everyone thought, look, what this is telling us is that, you know, capital. capitalism rules and we should just have freedom of mobility, not just of trade, the way we've been

having, but of the mobility of capital. And so, you know, in the early 1990s, the U.S. Treasury and the IMF, I think for understandable reasons, given the big events that had just happened took the view that you know that emerging markets and others should be opening up to foreign capital and that they should be having open capital markets and so this was kind of the the view as Tracy was describing sort of as of as of 20 years ago which is around the time that I I move from the from the Fed to the IMF so that that's that's where things were I mean, definitely, as Tracy was saying, sort of a bias that said, you know, capital should be free to move across countries. You really should not have capital controls.

So I'm curious, 20 years ago, was there much discussion of the pros and cons of capital controls? Or to what degree was it considered economic orthodoxy that you wanted free flow of money across borders? I think there were always some skeptics of the view that allowing capital to flow freely across national boundaries would always bring about the benefits to the recipient countries. But I would say that sort of after the fall of the Berlin Wall, there was a sense of euphoria that we needed to be open to all forms of capitalism, including sort of financial capitalism and financial globalization. So there were people like Joe Stiglitz and Danny Roderick who were a bit more skeptical, or I would say quite a bit skeptical that foreign capital would deliver benefits. But I think that most of us, I think, had sort of drunk the Kool-Aid and were very much in favor of having sort of open capital markets.

I mean, I certainly was in that camp 20 years ago. So this might be another sort of remedial question, but I understand at an extremely high abstract level, what open capital accounts mean and free flow of capital. But what does that actually mean capital controls? So if you say a country has implemented capital controls, or maybe a country ought to consider them, what are we typically talking about in practice in terms of creating an impediment to that free flow?

Yeah, so I think we're talking about things that would discriminate against foreigners versus domestic residents. We are talking about things that would say, if you want to bring in capital for a long period of time, two or three years, we will give you the following tax treatment. but if you want to bring in capital just for a short amount of time, you have to pay a higher tax. So, you know, the question is, I think most people recognize that there is sort of a pecking order, as you and Tracy were kind of discussing already, among the kinds of flows of capital, that, you know, there are some like foreign direct investment where I think the benefits are much more easy to demonstrate, and there is the hot money that you guys were talking about where it's not very clear what the benefits are

and no less a person than Stan Fisher. I remember hearing what he said at Jackson Hall Conference where he said Israel's governor, he said, I don't know what possible benefits there can be for us from short-term capital flows. And this is Stan Fisher. This is not just some fringe person. Not just some blogger.

Yeah, exactly. I think that the impediments we're talking about are sort of discriminatory taxes to discourage foreign capital when it is viewed that it is not serving the functions described, that was ascribed, or trying to put impediments that would try to force the foreign capital into longer duration investments rather than hot money. Can you talk a little bit about what impact capital controls can have on monetary policy of, you know, a domestic emerging market? We talk a lot about the impossible Trinity or the idea that you can only have two of three things. I think it's a stable exchange rate, an independent monetary policy, and an open capital account. So you can't have all three of those at once. What are the sort of limiting factors on emerging markets when it comes to how they control the flow of capital in and out? Yeah.

So with capital controls, what emerging markets are trying to do is to sort of operate in the gray zone of the impossible trinity. They're kind of trying to, you know, in a way, work around it by saying when problems get, get, severe, we are going to, you know, get around it by imposing controls temporarily at least in order to manage the inflows of a foreign capital. So it is indeed a way of getting around the so-called impossible trinity from theory. As you know, from the work of Elaine Ray and others, which I suspect you have covered in the past, emerging markets actually claim that they have even tougher time because regardless of the exchange rate that they choose, they feel that they are sort of helpless in the face of foreign capital. So the use of capital controls, the use of foreign

exchange intervention, which I should mention is another prominent tool that emerging markets are using. The use of these tools is a way to, again, as you and Joe were saying, kind of regain some policy space. I mean, as you were saying, I mean, during the pandemic, we've discovered that, you know, many EM central banks have been able to march into quantitative easing. And that's been a way of gaining some policy space. But capital controls and foreign exchange intervention are other tools that these countries have been using in order to have some defense.

when there are surges of foreign capital that come into their countries driven by, you know, changes in market sentiment elsewhere. So if you have risk on risk of episodes in the advanced economies, these countries are faced by huge surges of foreign capital. And to say that, well, you should just tighten fiscal policy or you should just let the exchange rate appreciate 30, 40, 50 percent. and say, well, that's it. That's what orthodox theory tells you,

and that's the best we can do for you. Has frankly proven not acceptable to these countries, and they have sort of innovated by using capital controls on occasion by foreign exchange intervention. And now, after the pandemic, through quantitative easing. So I think that what these countries are saying is that, you know, we can be unconventional just as you folks, the advanced countries were. Well, I want to get to in a minute this sort of beginning of the shift you described,

maybe starting 20 years ago, some rethink and why. But before we do that, just for listeners, I feel like when I hear foreign capital coming in, that doesn't automatically seem like a bad thing or risk. It's like capital. That's great. Money, cash. You'd like, you know, this sort of intuitive thing is it's, well, it's not immediately intuitive why that would ever be a problem. Can you just walk through real quickly, sort of like, what is the sequence of events in the classical sort of how these things go such that an influx of foreign capital ends up creating a crisis or a problem for the recipient country? You're absolutely right. I mean, we don't want to leave people with the impression that, you know, foreign capital is, is, is,

this is this terrible thing. I mean, you and I within the U.S. live within free capital markets within our borders. And it would be very difficult for us to be convinced that if D.C. and Maryland and Virginia put capital control, so this is going to make our lives much better. So it's true that we don't want to create the impression that foreign capital does not deliver benefits. It does. But the fact is that the global economic system is not. at the point where U.S. states are within the United States. So the capacity to absorb foreign capital is not the same the way it is within the United States. The impact that it has on particular sectors within your economy can be quite extreme. I

think Tracy mentioned the example of housing sectors within many of these countries. So you have a flood of foreign capital coming and suddenly house prices go up in Singapore, in Canada, in Australia, in New Zealand, in Hong Kong. So one of the things that has happened is that countries like Canada and Australia and New Zealand, who we think of as champions of free capital mobility, have had to put in place some measures that we would call capital controls in order to protect housing from being unaffordable in Toronto and Vancouver and Sydney and Melbourne. So if you can imagine that these kinds of effects are happening in Canada and Australia, you can imagine what's happening in a typical emerging market country when you're getting this huge inflow of foreign capital.

You have a financial sector that may not be fully developed and cannot really perform the function of taking. that capital and matching it to good users, often it's going to end up boosting prices in the housing sector. And from the perspective of the local residents, it's like, is this doing me any good? I mean, is it really to my benefit that house prices are going up in some neighborhoods in my cities? And so I think it's a question of absorption capacity. It's a question of how quickly the money can flow in and out. Domestic money is still going to be with you for a while. Foreign money at the first sign of trouble can easily leave the country and cause trouble.

So I think I hope that gives you a sort of a flavor of why it is that we can be fully in favor of foreign capital, particularly where countries have a financing gap, but nevertheless, you know, question and make sure that it is actually fulfilling the function that theory assigns it. The news doesn't stop on the weekends. Context changes constantly. And now Bloomberg is the place to stay on top of it all. Hi, I'm David Gurra. Join us every Saturday and Sunday for the new Bloomberg this weekend. I'm Christina Ruffini.

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Listen on Bloomberg Radio, stream the show live on the Bloomberg business app, or listen to the podcast. That's Bloomberg this weekend. Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg television, radio, and wherever you get your podcasts. So now that we've sort of set the scene about how people have been thinking about capital controls and why we don't necessarily want big influxes of money or outflows of money either, Could you maybe talk about what do you think is changing now? What's the spark that has set off a sort of review of this particular idea at the IMF? It's been an evolution.

So I wouldn't say that there was, you know, like one big event that set off this review. I think ever since the crisis in Thailand and Indonesia and Korea and, you know, in major. Asian countries, there has been a rethink going on. And what happened is that after the global financial crisis, many countries started using sort of a heterodox policy toolkit to manage surges of inflows as well as sudden outflows, which led the IMF to say, look, I mean, we've been thinking of moving in this direction anyway,

for the last 20 years. And here are all these countries after the global financial crisis, affected by this crisis through no fault of their own, trying to use a kind of heterodox policy toolkit to manage inflows and outflows. And so in 2012, the IMF actually officially changed its view on the use of capital controls.

It said that it recognized that these tools were useful in some contexts and that the country should be using them when it was in their best interest to do so. And at the time, this was treated as a big deal. I mean, I remember Paul Krugman saying this was a sign of the IMF surprising intellectual flexibility. And I know that the economists wrote it up as the recreation, you know, it's like the Pope had changed. the Catholic view on something. So but it was really an evolution in the direction of saying we recognize that emerging markets are facing really grave challenges from these surges and

sudden stops and that in response they are using capital controls, they're using foreign exchange intervention and we recognize that you know as long as they don't completely rely solely on these tools as long as they use, you know, standard tools like monetary and fiscal policy and exchange rate flexibility, we will be much more open to the use of these other tools in certain circumstances. So that was the kind of 2012, not in a global sense, but in the IMF's inside baseball sense was a big deal. And so our report, you know, is like looking at the roughly the 10 years after the IMF, made this big change and seeing how well the IMF has lived up to what it wanted to do in 2012.

So I think that's kind of the evolution. I think clearly the global financial crisis was a big factor, and now the pandemic is another big story. Shroom, I want to bring you in to get some of your thoughts. As you sort of look back on this period, were there any sort of notable sort of country-specific incidents either where a sort of new toolkit was unveiled or there was a failure to properly respond with policy leading to crisis, like which countries sort of or incidents sort of stand out as being particularly educational or useful for analytical purposes? Thanks, Joe, for having me.

in this conversation. I think just adding to precacious points, some of the country case studies that we worked on in our report across the world provided us quite a bit of a perspective on how countries deal with the issue of capital flows in general. So if you take, for example, India, India's case, I think the 2013 taper tantrum episode was one of the key points where we find in our report that the IMF could have responded in perhaps a better manner to the issue of having preemptive controls.

And if you take the countries in the sub-Saharan African region, which is another set of countries that we deal in our case studies, you also find similar experiences. But I think, broadly speaking, from the EM world, I think it's essentially the balance between having a sequence capital account opening to ensure capital comes in, but also ensuring that financial stability risks are taken care of to the extent that in some of our findings, we see that the use of preemptive capital controls as a sort of buffer to maintain this balance is something that would be useful for policymakers to kind of think about and also weigh in a bit more on that so that the balance between having a sequence capital account opening and having preemptive controls would provide the balance that's needed, especially in the emerging market space.

So, Joe, if I could just come in on that. I think what Sri Ram said sort of ties into, I think, the premise of what you were quizzing us on also is that, you know, foreign capital isn't bad. As part of this report, we spoke to, I would say, literally 100 or more very senior policy makers around the world in sort of confidential conversations. And I think the overwhelming feeling is that they want to remain open to foreign capital.

So as Sriram was saying, kind of paradoxically, they feel that having some flexibility to deal with extreme situations of surges or sudden stops through capital controls will actually give them the ability to keep moving towards foreign, towards more open capital markets. Because what they feel is that if they literally open up completely without these kind of safeguards

and there is a financial crisis, that actually sets back for them, the government, cause of globalization within their domestic constituencies. It becomes difficult for them to argue within their own political realm that, look, let's open up to foreign capital. People say, well, look, we just had this massive financial crisis. Why do you want us to open up? So, you know, the senior policymakers are very much in favor of open capital markets, but quite a number of them are saying, look, give us this flexibility. We are not going to abuse it. It's not like we're going to just impose capital controls, left, right, and center.

We just need it at specific times, and we need, frankly, IMF support at those specific times. And that will actually help us in the long run to keep moving towards more and more open capital markets, because our population will see that it's possible to keep opening up our capital markets without having financial crises. And I think that was the case of many, many countries that we saw around the world. Just to add to the precaution's point, I think, you know, the IMF also has to be credited in the sense, especially in sub-Saharan Africa, where it was previously criticized for promoting or advocating for an open capital account. And in recent years, the IMF has been fairly measured in these countries in terms of advocating for more open capital markets. To the extent that one of the findings that we have is that we would probably feel that the IMFS should do a bit more to allow or to encourage countries to open up the markets in that region.

So the IMF has made a lot of effort in recent years to balance its policies, which we also highlight in the report. Well, for your report, I think you spoke to quite a few people within the IMF, and I guess outside as well, to get their views. What was the sort of general thinking when you came to talk to them? And what were some of the views that you heard that you remember and that strike to you is interesting? I think, yeah, we did indeed speak to everyone within the IMF. I think just to make it clear to your listeners, the Independent Evaluation Office is sort of part of the IMF, but as the name indicates, it's also, it stays at arm's length from the IMF. the topics we choose to investigate are decided by the office itself. We are at arm's length from IMF management and its board.

So, you know, we have considerable freedom to pick the topics and do an in-depth report on them through candid conversations with IMF staff as well as outside. So I think within the IMF, people felt that they had been, in a sense, you know, sort of given their marching orders in 2012, and namely that they should be more open to the use of capital controls, and they should be more cautious about just pushing for capital account liberalization. So I think most people said they knew those were the orders, and they followed them, and we found that they followed them quite well.

almost to the extent, as Sri Ram was saying, that there was almost a sense that they were not willing to take any risks in advocating that countries go for increased openness to foreign capital. So, you know, in China and India, some policymakers told us that they were poised at different times where they could have made a push for more open capital markets, you know, given the political setting and the other construction. but the IMF was cautious and following the orders, 2012 orders. Outside the IMF and we spoke to senior policy makers, they also, as Sri Ram said, gave the IMF considerable credit for, you know, for in a sense fixing what the criticisms had been 20 years ago after the Asian crisis. So in that sense, the 2012 reframing of the IMF's position was considered as moving it, as having moved to a good place.

But I think there is a feeling now that, you know, even in the short space of less than 10 years, things have evolved and that countries need quite a bit more policy space to deal with the challenges that they are facing. In our report, at least, we take these views seriously and advocate that on the one hand, you know, the IMF should not back away completely from the view that open capital markets are good, it should actually be perhaps even a little more

aggressive on advocating open capital markets as a long-run goal. But at the same time, it should be even a little more open to the use of controls when they are needed. I mean, one example is Iceland in 2016. You know, Iceland, as you know, had just gone through a an enormous crisis in 2008, 2009. In 2016, they wanted to impose some capital controls because there was a surge of foreign capital. The IMF said, well, yes, you folks are experiencing a surge, but look, it's not as big as what you had during the global financial crisis.

And so, look, you really perhaps should not be imposing these controls. And the Icelandic authority said, that's precisely the point. We don't want to wait till what happened last time again happens. You know, this time we agree with you. The surge is not as big. But, you know, frankly, we'd rather impose the controls now preemptively so that it doesn't get to the repeat of the previous crisis. So that's the sense in which, you know, the IMF needs to be still a little more open

to the use of these sort of preemptive capital controls, recognizing that policymakers are, have bought into the idea of open capital markets over the long run, and that they are not going to use capital controls indiscriminately. That's something else that our report found when we did a very thorough survey of actual use of capital controls,

we found that they were not that frequent. It's just that when they are needed, countries want to use them. So let's talk about that what you just said when they're needed. Because, I mean, I think I heard one time, people have said, oh, the first rule of capital controls. You don't talk about capital controls because if you hint at the idea that you're going to lock money in or out of the country, then suddenly everyone tries to race against it. So you can't just like sort of wait till the crisis hits. And as you mentioned in the beginning of the chat, you know, sort of like some countries even ones have sort of very light versions of capital controls. You mentioned Australia and Canada

taking some, or New Zealand taking some efforts to curb their housing markets. So what are the parameters or guideposts you look at or that one looks at so that a country or the IMF can evaluate when capital controls are appropriate so that these decisions are not being made once the crisis has already started and even the mere chatter of capital controls would only make things work. Yeah. So, I mean, there are a number of principles one can use. First, I think, as your question suggested, you know, controls on outflows are always going to be more difficult than controls on inflows. So, I mean, you have to be thinking of this dynamic game and saying, well, if I don't want to be in trouble during the outflows, what do I have to do now?

So the question is when the surge is starting, that's when you have to think about what is it that I'm going to tell foreign investors and what is it that I'm going to be frank and clear with them about. So that's the stage when you can tell them, look, folks, we welcome your capital. We need it. It's going to help us. but it's not going to help us if you leave at the first sign of trouble or anything else. So when it's coming in is when you can impose some conditions on the money coming in.

So that's what I was talking about. Like that's the stage where you could tell people, look, if you bring in money for three months, here's the tax. If you bring in money for two years, here's the lower tax. So if you are clear with them at the outset about what the conditions are that would apply to them, that is something that you can do. And then at that stage, people will have less of a chance to complain and say, oh, you're imposing capital controls. You say, no, look, we told you this was the differential tax rate that was going to prevail based on maturity. And we are just imposing the rules. So, you know, as part of this report, we actually talked to rating agencies and other folks in global financial markets.

And they said that obviously what investors hate is uncertainty about what the rules are going to be. So if a country is sort of upfront about what the regime is going to be under which people can move money in and out, investors can live with. even a somewhat more restrictive regime that says, look, I'm sorry, but the tax rate on moving money in and out over short durations is going to be much higher than if you bring in money over long durations. So I think that's something that's very important for EMs to keep in mind. They do need the foreign capital, but they should have a fair bit of transparency in the regime and not really subject that regime to frequent and arbitrary changes. I think that's what foreign investors say it is the uncertainty.

I mean, that said, there can be always severe stresses where during outflow situations, countries may need to do what they need to do. And I think to the extent you can predict the course of events, you should be transparent and clear with foreign investors about the real. regime, but as we found, for instance, in the situation that Sri Ram was describing, you know, India had no idea that the taper tantrum would have such a massive impact on its capital outflows. There's no way that India could have credibly told people ahead of time, look, we're not going to touch you.

It was such a severe crisis. You had the rupee depreciating like crazy in a three-month period. I think there are always situations like that where countries have to do what's in their best interests and often that's when they're looking for support from the IMF to say, look, this is a severe situation. The country will be using some capital controls

and I think we think that this is a good situation for it. You know, China 2015, you know, severe stresses, use capital controls and again would have looked who was looking for a strong IMF support. Just to add to that, Joe, I think this also reflects on a bigger point of both institutional capacity and arbitrariness with this controls in the sense.

I think what Prakash is trying to say is that we would, our investors are more than happy to have a consistent set of policies which they are, you know, attuned to. So the challenge for EMs is to have a set of policies which is consistent, not arbitrary, but yet providing the necessary confidence to the market. So I think from an emerging market's point of view, dealing with this crisis is that's basically the, you know, besides the balance, the key is to get consistency of their policymaking.

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When news breaks, we'll have an episode up in your podcast feed within minutes. So you're always getting the latest stories and developments. Get the reporting and the context from Bloomberg's 3,000 journalists and analysts we're all over the world. Listen to the latest from Bloomberg News Now on Apple, Spotify, or anywhere you listen. I have a slightly weird question, but to, To what extent should we be viewing this new attitude towards capital controls as a sort of reflection of, I guess, a growing recognition that there are certain parts of globalization

that might not be desired. So we've seen this in various avenues of life, but I mean, trade restrictions would be the obvious one. We've seen a number of countries institute trade barriers of one or another to protect their domestic economies, is embracing capital controls basically another way of controlling the globalized economy and trying to make it work for you better? That's not a weird angle at all. To me, that is, you've gotten to the essence of it, I think, which is, yes, you know, globalization is wonderful. It works for the average person, It works for most of us, most of the time, but clearly there are segments of the population

which are not seeing the benefits or are not convinced of the benefits. So that's exactly right. I mean, I think, as you said, we are seeing this with trade, which I feel is really quite beneficial to the large majority of people in most countries. But I think we are seeing this

particularly with financial globalization. I think people are simply not seeing the benefits, the widespread benefits across their societies of unfettered flow of foreign capital. And I think paradoxically trade is getting blamed for some of the sense of financial globalization. I mean, I think these are siblings, but the wrong sibling is drawing.

the blame. I think, you know, people like Danny Roderick have talked about this and called it sort of hyper-globalization, namely that we've taken a good thing and pushed it to a point where it's, the benefits are not evident. Some people are losing out, and we are seeing a backlash. And I think this goes a little bit to what I was saying, that it actually allowing some flexibility in in having countries step back a little bit from globalization is paradoxically the way that we will keep moving ahead on it because otherwise the backlash will actually keep us from advancing. And as Tracy said, we are seeing it in trade.

We did see it a bit against financial globalization also, you know, with the kind of the Occupy Wall Street movement and the one percenters and all that. I think that's a recognition that many people are not seeing how extreme financialization or hyperglobalization is actually benefiting them. I like that phrase that you use, siblings. And so this, you know, and we think, you know, I remember the late 90s and there was just so much optimism about free trade and international investments and opening up emerging markets and so forth. and your view is like we can have trade and we can have the benefits of trade even if we sort of, even if countries adopt a perhaps more conservative and cautious view on the sort of the financial, from the financial perspective.

Yeah, exactly. I think some amount of financial globalization has to proceed to back up the increased trade links. Right. But it doesn't have to be necessarily to the extent that we have. particularly hot money. And again, I go back to Stan Fisher. I mean, you know, if Stan Fisher, when he was governor of the Bank of Israel, couldn't see what benefit he was getting from short-term hot money flows, we all have to ask ourselves. I mean, you know, what, what is it

that these flows are doing? And if they are bringing benefits, I think it's something that that needs to be demonstrated. I think even for the benefits to, you know, like what Prakash mentions, for the benefits to flow through, for people to recognize that, I think you probably need to take a step back and look how, you know,

we need to evolve this into a more kind of a sustainable proposition so that the benefits, you know, is seen by the people who are, consuming. So Joe, just to go back to sort of the theory that we talked about at the start about why foreign capital helps, you know, one way foreign capital helps is that, you know, it matches foreign capital to deserving recipients within the country. But what about a country where a large fraction of the people don't have bank accounts?

they're not really plugged into any system where they could draw on this foreign capital. And that's some of the work to its credit that the IMF has done is on financial inclusion. And that has led to the recognition that, gee, yes, we thought foreign capital should be benefiting lots of people. But hey, what about these folks who are just completely unplugged from the financial system in their domestic economies? how in the heck did we think they are going to benefit? And so, you know, that's been part of the rethinking is to say, look, guys, we need to be not just spouting the theory. We need to think about how, you know, people on the ground are going to benefit from this foreign capital. So I think that's been a very salutary lesson.

Both of you, Prakash and Sharam, thank you so much for joining us. Thanks, guys. Thanks, Joe. Thanks, Tracy. I've always enjoyed this podcast. Good to be on it. Thanks. That means a lot. So glad to have you both. Yeah, thank you. That was a really enjoyable conversation. Interesting topic. You know, got me, what we were talking about at the end, you know, definitely reminded me of our conversation earlier in the year with Matt Klein, the author of Trade Wars, our Class Board. Just this idea of unfettered trade or particularly unfettered flow of capital exacerbating domestic inequalities.

and creating a situation which you end up with a large portion of the public that just doesn't see the benefit of sort of openness to the world. Yeah, absolutely right. It's sort of the financialization flip side of the like hard flow of goods, isn't it? But I thought that whole discussion was really, really interesting. I thought, I don't know, everyone has this idea of the IMF as this really like slow and lumbering bureaucracy that never really changed. changes its mind. But it's interesting to see the beginnings of a policy shift playing out in real time. It's definitely a slow process, but it does seem to be happening. Yeah, it seems to be happening. And the framework or the way, and your question really got at it, but the way they talk about it is

coherent. It's like they're not going, the IMF is not any time going to give up on its general view that globalization is good and free trade is good and even open capital accounts are good, but tactically to get from here to there, if you move too fast, if countries don't have the tools to prevent crises, then you'll never like get to that endpoint. Yeah. I mean, I think there's a growing recognition that there, if you're going to pursue globalization for all, thinking that it's going to benefit everyone, if there are pockets that aren't seeing those benefits, that are being challenged.

it's okay to do sort of pinpoint policies to address what those issues are. It doesn't mean you've completely backed away from liberalizing the current account or free trade altogether, which again is like is a huge policy shift. Wait, Tracy, can I compliment you on something? Oh, no. What? I was really impressed that on the fly you were able to remember the three corners of the Trilema or the impossible Trinity.

As soon as you said, like, I feel like I'm putting it. It definitely wasn't on the fly. Oh, were you, were you Googling it at the time? It wasn't on the, I wrote it down. Oh, well, I was. No, I wrote it down before we had this conversation. You knew it was going to come up, right? I really thought that you just sort of extemporaneously remembered the three,

I'm still impressed that you, like, at the beginning of the conversation that you knew to have it. I'm not quite as impressed that you, like, wrote it down and, like, Googled it beforehand. But it was still smart to anticipate that we were going to go there and to have them at your disposal. And the way you said it, it kind of sounded like you were like thinking about it at the time. So it was just well done. That's because I was desperately searching for my notes to find the last one. No, okay, maybe I shouldn't have said anything.

Yes, Joe, I remembered it. And, you know, it's all in my head. Okay. Shall we leave it there? Yeah, let's leave it there. Okay. This has been another episode of the All Thoughts podcast. I'm Tracy Alloy.

you can follow me on Twitter at Tracy Allaway. And I'm Jill Wisenthal. You can follow me on Twitter at the stalwart. And you should go check out the report from our guest. There are two of the contributors, the IMF advice on Capital Flows Evaluation Report. I want to thank our guest, Prakash Lungani, and Shuram Bala Subramanian.

And be sure to follow our producer, Laura Carlson. She's at Laura M. Carlson. Followed the Bloomberg head of podcast for Francesca Levy at Francesca today. And check out all of our podcasts under the handle at podcast. Thanks for listening. I'm Francine Lacquhar, an award-winning journalist. And I've got a new podcast, leaders with Francine Laqua from Bloomberg Podcasts.

I've interviewed everyone from Heads of State to fashion icons about the news of the moment. But I've always been curious, who are these people as leaders? I don't think there's one right way to be a leader. Make decisions. A poor decision is always better than no decision. Listen to new episodes every other Monday. Follow leaders with Francine Lacroix wherever you get your podcasts.