So, what do we do now? Do we wait for a third incidence to judge a conclusion as per the principle "One is a blip, second is a coincidence, third is a trend"? Or will we start to take the ongoing process seriously? Capital controls used to be blamed. But now, they are not considered as bad. Have you noticed that the IMF, guardian of the global system, has not pressed a motion of censure yet? We believe they are also trying to figure out. What is going on? Why is that so? What is the message lying behind?

On 10^th November, Taiwan banned foreign funds parked in time deposits. Until today, foreigner could keep their funds as time deposits for three months. But now they cannot. Those keeping funds in three month time deposits could extend the maturity for another three months. Now, they cannot. As claimed, the amount that are kept in time deposits and not channeled to an instrument like bonds and bonds has risen to $15.5 billion. As the actual amount quintupled the estimated amount, it become crucial to introduce a measure. In the recent period, 30 percent of the inflowing funds were parked in time deposits while the rest was shared equally between bonds and bills.

So what happens? You transfer the US Dollars you hold to a Taiwan bank. Then, you convert the US Dollars into Taiwan Dollars. This way, demand for Taiwan Dollars increase leading to the appreciation of Taiwan Dollars; just in the case for Turkey. After that, you put the Taiwan dollars into a deposit account. So, you neither enter the bill and bonds markets nor undertake any risk. In the meanwhile, domestic currency appreciates and goods Taiwan exports become more expensive. In the current climate where export markets did not ameliorate completely and competition become severer, the country with an appreciated currency faces troubles in terms of competitiveness. Just like Turkey. The recovery of the country's economy is delayed. Just like Turkey.

Brazil also took the same step. Remember; they have imposed an additional tax on foreign funds invested in bonds and bills. Though tax rate was quite low, it was an indicator of good will. The decision made in Taiwan on 10^th November does not imply a tight capital control. Tongue in cheek; it says "either invest or leave" to inflowing foreign funds. This should be regarded as a sign of good will. This is in fact a warning. Just as in the case of Brazil.

So, does this the unique characteristic of the transition period we are in? Or when defining the normal are we going to talk about a world where capital controls are considered normal? To be honest, no one has the strength and means to look that forward. The decision of Taiwan to control capital inflows following Brazil must be considered as a measure to resolve the severest problem. The issue is closely and directly related with the recovery processes in individual countries and the efforts of the administrators in those countries to tackle unemployment. Those seeking to tackle the problem today have to invent a method of solution for the current problem. It is not surprising that such warnings and trials continue coming from countries which are not stuck in policy inertia and which make effort to solve the problems of public.

What is the message we must get from these individual measures? The message is clear: process of global recovery is not carried out in a coordinated manner. Low interest rates in developed countries resultant from crisis measures lead to a global wave of saving. Though the magnitude of the wave is smaller than before, the impact is bigger on everyone due to the fall in import-based demand for dollar. This wave disturbs developing countries like Turkey to a larger extent. As Frederic Mishkin recently pointed out in Financial Times, in the past the impact of this wave would have been higher along with the contribution of derivative instruments. But this is not the case now.

What does this imply? Mishkin and Roubini, who brought this issue forward, can sleep well for the risk their country, the core, the financial system, accumulates. For them, the threat is not as serious as before. However, life is not that easy for countries like Turkey. As we have speculated in many commentaries with the title "Valuable TL implies unemployment" since July, appreciation in the domestic currency brings not "creative destruction" but literal destruction given the current climate where export markets contract, economies are short winded and unemployment elevates. This is the difference between yesterday and tomorrow.

Failing to understand the problem now and assessing the issue only on the basis of healthiness of developed countries' banks would be a major mistake for Turkey. Capital controls are closely related with fighting unemployment for countries like Turkey.

Either developed countries assist the developing countries or the new 'normal' contains capital controls.

It would be useful to take into account the warnings from Brazil and Taiwan. New financial system regulations will be considered with this lens. Maybe, the new 'normal' will include measures like capital controls. We will see.

This commentary was published in Referans daily on 14.11.2009