IMF AND ITS NEW STAND

Recession brings the question of protectionism in our minds. Another question which still remains in academic studies of Economics is: ‘Should we keep a check on foreign capital inflows’. Brazil has already imposed a 2% tax on capital inflows during late 2009. And why did they opt for such a move? I’ve already mentioned it in one of my recent articles: INTERNATIONAL PAYMENTS AND THE INTERNATIONAL MONETARY SYSTEM. I can explain it once more once again: - Large forex inflows caused a huge appreciation of the Brazilian currency (Real). Due to this appreciation their export competitiveness saw a downfall. This might be a bit difficult for some to understand so let me explain it with an example: Suppose 1$ = 50Rs (Indian Rupee). We know that India is a major exporter to U.S. Now imagine that Indian currency has appreciated and say, the exchange rate has come to 1$ = 30Rs. U.S needs to pay more now. At the same time while we think India must be reaping a lot, India is actually facing a bigger competition now. It is because the U.S may get a cheaper alternative for the goods they purchase from India. Thus India’s export competitiveness is undermined.

Till last year IMF was against taxing of capital inflows, because it would be a hindrance to the self adjusting economy. (IMF of course gave freedom to every economy to decide their stand on this). As economies all over the world are emerging from recession, larger amount of inflows are quite normal. This happens because developed economies seek investment in developing economies because of the laters economic growth rate and trend.

The IMF has recently revisited their belief of “Opposed Capital Controls” and states controls are sometimes justified as a part of the policy framework for an economy seeking to tackle surging inflows. IMF’s study reveals that those economies which had put restraints on capital inflows has seen a less sharp decline in GDP.

IMF’s new stand shows that they are seeking to understand ground realities and help economies to move in the right path.