Post-crisis prescription for Turkey: "Tight monetary policy instead of capital controls" At the panel titled "How to Manage Capital Flows" organized by Global Development Learning Network, Anne Krueger recommended 'tight monetary policy' to Turkey in response to the question of TEPAV as to which policies other than capital controls could Turkey implement.
ANKARA - At the panel titled "How to Manage Capital Flows" organized by Global Development Learning Network, a World Bank Organization' the question on the management of capital flows after the crisis, posed by TEPAV on behalf of Turkey was discussed a long time. In response to TEPAV's question as to which policies other than capital controls Turkey could implement, Former IMF Vice President of the IMF Anne Krueger recommended 'tight monetary policy'.
The video conference panel with the title "How to Manage Capital Flows" organized by Global Development Learning Network was held on October 7, 2010 with the participation of Brazil, Mexico, Poland, South Africa, and Turkey.
In the panel, which was hold in the World Bank Washington DC conference hall, Turkey session was carried out through a video conference coordinated by TEPAV. The session at TEPAV was participated by senior officials from the Central Bank, Undersecretariat of Treasury, Undersecretariat of Foreign Trade, State Planning Organization, Capital Markets Board, World Bank Turkey Office and IMF Turkey Representative Office. The session broadcasted live throughout the world via the World Bank web site was moderated by Zanny Minton Beddoes, Economics Editor at the Economist magazine, in Washington and by Prof. Dr. Fatih Özatay, Director of TEPAV Economic Policy Research Institute and professor at TOBB University of Economics and Technology, in Turkey. Panel speakers were Anne Krueger, former Deputy MD at the IMF and former Vice President and Chief Economist at the World Bank; Yaga Venugopal Reddy, former Governor, Reserve Bank of India; Guillermo Calvo, Professor of Economics, International and Public Affairs, and Director of the Program in Economic Policy Management (PEPM) at Columbia University; Hyun Song Shin, Senior Advisor for International Economy to the South Korean President; and Malcolm Knight, Vice Chairman of Deutsche Bank.
Turkey's question set the agenda
After the discussions and recommendations on the management of capital flows in the post-crisis era, participant countries' questions were addressed. In this part the question TEPAV posed on behalf of Turkey was discussed for a long time. TEPAV asked the speakers to what extent it was logical to use capital controls as a policy tool to prevent rapid capital inflows and appreciation of the lira, potential impacts of capital controls for countries which grow through current account deficit and suffer from saving gap, Turkey being one among those, and alternative policies to be implemented. In her response Anne Krueger, former Deputy MD at the IMF and former Vice President and Chief Economist at the World Bank, underlined the critical importance of monetary and fiscal policies and stressed that Turkey could overcome the savings gap problem only with tight monetary policy.
Guillermo Calvo, Director of the Program in Economic Policy Management (PEPM) at Columbia University also maintained that an economy sticking to tight monetary policy would become more attractive for short-term investors, accelerating capital movements. Calvo went on saying that in the past countries imposing capital controls failed to manage current account deficits and to change exchange rates and that short-term capital in time ensured to by-pass the controls.
Rest of the speakers discussed the effect of prudential policies and regulations on eliminating the negative impacts of capital inflows. It was agreed that further addressing of the policies and regulations that will minimize the fragilities in banking and financial sectors is necessary. In this context, Hyun Song Shin, Senior Advisor for International Economy to the South Korean President, explained the successful Korean experience where regulations developing the capital structure of banks and defining upper limits for borrowing reduced the fragilities in the financial sector.
Options for developing economies limited
At the beginning of the panel debate, speakers emphasized that the crisis measures implemented by industrialized rich countries, from which the global crisis spread, affected the developing countries adversely limiting the policy options for them. They underlined that beggar thy neighbor policies could cause significant harm even in economies with solid macroeconomic structure and posed further risks for countries banking sectors of which have high FX liabilities.
Another issue highlighted at the panel was the evaluation of exchange rate regimes with special emphasis to problems caused by high capital inflows (including loss of competitiveness, distortion of foreign trade balance, overvaluation of asset prices, etc.). Different opinions were featured on this issue:
Hyun Song Shin prescribed a floating exchange rate regime which allows intense interventions in the exchange rate when things go out of track, while Anne Krueger, drawing attention to the difficulty of deciding whether or not things or track, recommended that exchange rate regime should be as free as possible and the focus must be on a fiscal policy that will secure fiscal discipline. Yaga Venugopal Reddy argued that it will not be hard for policy makers to sense macroeconomic volatilities whereas Malcolm Knight stated that accumulating reserves would be a good policy option, reducing the risks posed by capital flows.
China's low exchange rate policy on agenda
In the next session, China's low exchange rate policy was also discussed. It was underlined that in order to maintain their competitiveness, countries do not want their currency to appreciate as long as the value of Yuan remains low and thus inertia in exchange rate movements was observed. On the other hand, Anne Krueger added that current account deficits cannot be explained solely by low exchange rate in the case of some countries.
The debates set forth that implementing the underlined prudential policies and regulations were not enough alone for developing economies and that this would in fact pose a significant risk for those if industrialized economies do not devise similar policies. Stressing again that the crisis measures implemented in G-7 economies affected developing countries negatively, Malcolm Knight maintained G-20 economies demonstrated a more favorable outlook in the process. Within this perspective, the significance of international policy coordination was highlighted. Yaga Venugopal Reddy maintained that securing stability of the domestic economy is the first step for solving the problems.
Call to G-20 for the world economy
In the closing session of the panel, it was voiced that the problems of the world economy should be solved with wider participation and G-20 countries should assume a more active role in the process. It was also underlined that it is of critical importance to focus on the technical details of the prudential policies tailored to manage capital flows and to design a policy set combining these policies with monetary and fiscal policies.
To watch the panel click here.
