Emerging economies reject IMF plan

Representatives of emerging nations rebuffed an International Monetary Fund (IMF) plan to guide them on managing huge flows of capital into their economies, viewing it as a way to constrain their actions rather than help. The IMF's policy-steering committee, at its spring meeting over the weekend, responded by effectively delaying the plan, which would influence the use of capital controls—tools such as taxes and restrictions on foreign investment. The committee agreed to study the issue more in coming months.
The IMF's recent endorsement of capital controls marked a reversal in its longstanding opposition to limits on the free flow of capital around the world. IMF officials had come to acknowledge emerging markets' need to curb surging inflows, which can fuel asset bubbles and inflation and hurt domestic exporters by driving currency values higher.
The IMF's plan would have encouraged nations to treat capital controls as a last resort, after they had first tried use other tools, such as policies on interest rates, currency values and government budgets.
But ministers of developing economies resisted vehemently, viewing the proposal as an effort by advanced economies to hamstring their policies. Brazil, Turkey, South Korea and several other developing countries have adopted capital controls over the past year to limit surging inflows.
"We oppose any guidelines, frameworks or 'codes of conduct' that attempt to constrain, directly or indirectly, policy responses of countries facing surges in volatile capital inflows," Brazil's finance minister, Guido Mantega, told the IMF's steering-committee meeting.
The fight over capital controls comes amid a continuing battle over who is to blame for the flood of capital flowing primarily from sluggish advanced economies into faster-growing developing countries.
Developing countries blame the U.S. Federal Reserve, in particular, as a fountain of excess capital because it is holding short-term interest rates near zero and pumping money into the economy by buying government bonds. Developed countries trace the problems primarily to China's policy of tightly controlling its currency's value, and also to the tendency of investment capital to flow to the economies with the fastest growth.
The IMF committee directed the fund to study the issue with more focus on the sources of capital inflows.
Proponents of the IMF plan say it is largely designed to establish a shared understanding around the use of capital controls. "It's never going to be a hard set of rules with sanctions," said Angel Gurria, head of the Organization for Economic Cooperation and Development, which represents the U.S. and other advanced economies. "It's not a question of stopping countries from doing whatever they feel they need to do. It's about creating a comfort zone." 

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