Stiglitz Calling For Capital Controls

As a Nobel prize winner, Joseph Stiglitz’s views have some weight. Now he considers capital controls a legitimate policy option for emerging markets:

Stiglitz Sees Bubble Risk in Emerging Markets as Fed Expands U.S. Stimulus

The U.S. Federal Reserve’s plan to expand stimulus will fuel potential asset bubbles in emerging countries with strong growth that don’t have capital control measures, Nobel Prize laureate Joseph Stiglitz said.

“I do have worries on countries like India,” Stiglitz, a Columbia University economics professor, said today at a conference in Hong Kong. “The strong economies that don’t yet have capital control become the focal point for all this money.”

Monetary easing to spur growth in developed economies has sparked inflows of cash to Asia, threatening to propel higher prices for stocks, real estate and consumer goods. Asian nations may need capital control steps to curb the risk of asset bubbles forming due to the Fed’s easing, World Bank Managing Director Sri Mulyani Indrawati said this month.

Stiglitz said he is “not so worried about China,” because policy makers there are already concerned about the risk of property-price bubbles and they could use policy tools to cool the market in the world’s fastest-growing major economy…

…While the latest round of easing is “not likely to strengthen the U.S. economy very much,” it would “cause problems all over the world,” Stiglitz said. Responses from other countries include “exchange-rate intervention, capital control and taxes and so forth that are fragmenting the global capital market,” he said…

…“Real estate investment and green investment would be an important part of an answer of how Asia would be able to maintain growth even though the traditional markets remain relatively weak,” he said. China’s investment in infrastructure is boosting economic growth in the long run and its rebound from the global financial crisis is an “impressive success story,” Stiglitz said.

Bear in mind his intellectual biases – Stiglitz is a prominent post-Keynesian scholar, so he’s pretty far off the mainstream.

Capital controls are of course aren’t the only option in dealing with hot capital inflows – most countries have resorted to full or partial sterilised forex intervention to reduce the impact. But over time, we’ll probably see more selective capital controls coming in, such as what China proposed two days ago. Malaysia? I’m not going to pretend to know, though the noises coming out of BNM is that there aren’t any plans to…yet.

One thing that I found hasn’t been discussed at this stage is a fairly obvious, longer term option – fiscal consolidation. This isn’t the first best option, as it doesn’t directly address monetary conditions or financial markets. But if high liquidity leading to too-easy credit conditions is contributing to economic overheating, then there’s a good reason to consider reducing government expenditures.

The problem for most emerging markets in this context is simple –cutting government expenditures targeted at economic development and institution building isn’t a good long term strategy. Then there’s the long lag between fiscal planning, action and final economic impact, which complicates the timing of fiscal action. Monetary policy is a faster, surer way to manage short-term fluctuations in output and prices.

But given the conditions in the global economy right now, with growth expected to remain low and uncertain in developed economies and global capital flows looking for yield, then every policy option ought to be explored – cuts in operational expenditure can always be pursued.

I don’t think we’re quite at the stage where Malaysia has to do this, but let’s keep it in mind.