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Comments on Capital Control
Jorge ArbacheBrazilian Development Bank and University of Brasilia
This presentation does not reflect the views of the Brazilian Government or the board of the BNDES
Carnegie Endowment for International Peace, May 4, 2010
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Structure of presentation
1. Some evidence on capital control, capital flow, institutions and output growth
2. Brazil
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1. Some evidence on capital control, capital flow, institutions
and output growth
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Data
• Financial openness data: 0~1 • Source: Schindler 2009• Period: 1995-2005• Number of countries: 61
• Financial flows: % GDP • Source: Reinhardt 2009• Period: 1985-2008• Number of countries: 43
• Growth acceleration and deceleration: dichotomic variables• Method: Arbache and Page 2007• Period: 1980-2008• Number of countries: 162
• Institutions and policy indicators: -2.5~2.5• Source: World Bank Governance Indicators
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Some basic statisticsEmerging economies
During growth acceleration During growth deceleration
Overall restrictions (0-1) 0.44 0.43
Shares restrictions (0-1) 0.43 0.52
Bonds restrictions (0-1) 0.39 0.51
Money market restr. (0-1) 0.42 0.45
FDI restrictions (0-1) 0.43 0.37
Debt liabilities (% GDP) 49.0 88.9
Non-financial FDI (% GDP) 25.7 13.6
Equity liabilities (% GDP) 5.8 2.2
Financial FDI liabilities (% GDP) 0.03 0.02
0 – unrestricted capital account; 1 – restricted capital account
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Is capital control more likely to be adopted in countries with weak or strong institutions?
Correlation coefficients - capital control and institutions* 1% significance level; ** 5% significance level
Overall rest.; shares; voice and accountability and regulatory quality – larger coef.
Political stability (-2.5 to 2.5) -0.21*Voice and accountability (-2.5 to 2.5) -0.33*Regulatory quality (-2.5 to 2.5) -0.30*Rule of law (-2.5 to 2.5) -0.15*Government effectiveness (-2.5 to 2.5) -0.14*Political stability (-2.5 to 2.5) -0.15*Voice and accountability (-2.5 to 2.5) -0.31*Regulatory quality (-2.5 to 2.5) -0.27*Rule of law (-2.5 to 2.5) -0.10*Government effectiveness (-2.5 to 2.5) -0.11*Political stability (-2.5 to 2.5) -0.14*Voice and accountability (-2.5 to 2.5) -0.25*Regulatory quality (-2.5 to 2.5) -0.18*Rule of law (-2.5 to 2.5) -0.10**Government effectiveness (-2.5 to 2.5) -0.06Political stability (-2.5 to 2.5) -0.11*Voice and accountability (-2.5 to 2.5) -0.16*Regulatory quality (-2.5 to 2.5) -0.17*Rule of law (-2.5 to 2.5) -0.05Government effectiveness (-2.5 to 2.5) -0.04Political stability (-2.5 to 2.5) -0.09**Voice and accountability (-2.5 to 2.5) -0.29*Regulatory quality (-2.5 to 2.5) -0.18*Rule of law (-2.5 to 2.5) 0.00Government effectiveness (-2.5 to 2.5) -0.04
Direct investments restrictions (0-1)
Overall de jure restrictions (0-1)
Shares restrictions (0-1)
Bonds restrictions (0-1)
Money market restrictions (0-1)
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Do weak institutions discourage capital inflow? Correlation coefficients - capital inflow and institutions
* 1% significance level; ** 5% significance level
Debt liabilities – no correlation
Debt liabilities (% GDP)
Political stability (-2.5 to 2.5) -0.00Voice and accountability (-2.5 to 2.5) 0.09Regulatory quality (-2.5 to 2.5) 0.08Rule of law (-2.5 to 2.5) 0.03
Government effectiveness (-2.5 to 2.5) -0.02
Non-financial FDI liabilities (% GDP)
Political stability (-2.5 to 2.5) 0.04Voice and accountability (-2.5 to 2.5) 0.15*Regulatory quality (-2.5 to 2.5) 0.33*Rule of law (-2.5 to 2.5) 0.29*
Government effectiveness (-2.5 to 2.5) 0.30*
Equity liabilities (% GDP)
Political stability (-2.5 to 2.5) -0.05Voice and accountability (-2.5 to 2.5) 0.07Regulatory quality (-2.5 to 2.5) 0.22*Rule of law (-2.5 to 2.5) 0.28*
Government effectiveness (-2.5 to 2.5) 0.36*
Financial FDI (% GDP)
Political stability (-2.5 to 2.5) 0.22*Voice and accountability (-2.5 to 2.5) 0.40*Regulatory quality (-2.5 to 2.5) 0.50*Rule of law (-2.5 to 2.5) 0.34*
Government effectiveness (-2.5 to 2.5) 0.45*
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Does capital control affect output growth? Logistic regression RE (z statistics in parentheses)
Dependent variable: Growth
deceleration
Model 1 Overall de jure restrictions (0-1) 0.69 (0.68)
Model 2 Shares restrictions (0-1) 1.63 (1.69)
Model 3 Bonds restrictions (0-1) 1.05 (1.09)
Model 4 Money markets restrictions (0-1) 1.14 (1.37)
Model 5 Direct investments restrictions (0-1) 0.19 (0.25)
Dependent variable: Growth
acceleration
Model 6 Overall de jure restrictions (0-1) 0.19 (0.45)
Model 7 Shares restrictions (0-1) -0.12 (-0.29)
Model 8 Bonds restrictions (0-1) 0.04 (0.10)
Model 9 Money markets restrictions (0-1) 0.12 (0.32)
Model 10 Direct investments restrictions (0-1) -0.04 (-0.11)
No evidence that capital control prevents growth collapse – no long term impacts
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Does capital inflow affect output growth? Logistic regression RE (z statistics in parentheses)
Dependent variable: Growth
deceleration
Model 1 Debt liabilities % GDP 0.01 (3.25)
Model 2 Non-financial FDI % GDP -0.08 (-6.40)
Model 3 Equity liabilities % GDP -0.30 (-3.45)
Model 4 Financial FDI liabilities % GDP -24.05 (-0.99)
Dependent variable: Growth
acceleration
Model 5 Debt liabilities % GDP -0.01 (-5.40)
Model 6 Non-financial FDI % GDP 0.03 (5.85)
Model 7 Equity liabilities % GDP 0.05 (3.32)
Model 8 Financial FDI liabilities % GDP -1.31 (-0.28)
Non-financial FDI and equities are associated with less growth collapses and more growth acceleration; debt liabilities: the opposite
• Capital controls: more likely in countries with weak institutions• FDI and equity capital: flow to where institutions are strong; no
relationship between institutions and debt– Debt liability probably driven by other factors
• Capital control does not prevent growth collapses– It may be effective under certain conditions– Long term impacts unlikely
• FDI and equity capital reduce growth collapses and increase growth acceleration
• Debt liability increases growth collapses and decreases growth acceleration
Capital control on short term capital: policy option
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2. Brazil
• Brazil:
– Liberalized the capital account– Adopted floating exchange rate– Adopted inflation target– Prudential financial regulations in place– Investment grade status 2008/09– Attracted a lot of foreign resources– Reserves have increased substantially
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Capital inflow has increased sharply in recent years
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Brazil has liberalized the capital account Source: Schindler 2009
0 – unrestricted capital account; 1 – restricted capital account
0
0,2
0,4
0,6
0,8
1
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
Brazil
China
Indonesia
India
Mexico
Russia
Turkey
South Africa
Recent measures on capital control
• March 2008: taxes on capital account transactions, 1.5%; several exemptions
• May 2008: coverage extended to prevent circumvention• October 2008: taxes lifted
• October 2009: 2% tax on fixed-income and equity inflows• November 2009: 1.5% tax on certain trades to prevent
circumvention
No evidence that these measures have been effective to discourage capital inflow (IMF 2010)
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Brazil: composition of financial flows Source: Central Bank
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Otherinvestments
Derivatives
Portfolio
FDI
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
2003
2004
2005
2006
2007
2008
2009
Otherinvestments
Derivatives
Portfolio
FDI
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Bonds
Equities
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
2003
2004
2005
2006
2007
2008
2009
Bonds
Equities
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External sector indicators have improved significantly… Source: Central Bank
Reserves (US$1,000)
0
50.000
100.000
150.000
200.000
250.000
300.000
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Reserves (US$1,000)
0
50.000
100.000
150.000
200.000
250.000
300.000
2003
2004
2005
2006
2007
2008
2009
0
20
40
60
80
100
120
140
2003
2004
2005
2006
2007
2008
2009
Debtservice/exports(%)
Debtservice/GDP(%)0
20
40
60
80
100
120
140
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Debtservice/exports(%)
Debtservice/GDP(%)
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Public debt dollar denominated (%)
010
2030
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Net external debt of public sector - % GDP
-15
-10
-5
0
5
10
15
20
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
…but there are increasing challenges
Source: Central Bank
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Is capital control needed in Brazil?
• Exchange rate appreciation• Widening current account deficits• Export competitiveness impacts• Asset prices: Bovespa index increased more than 300% since
2005; real state at record price levels• Prices anchored on cheap imports• Inflation pressures• Effectiveness of monetary policy questionable
A more vigorous capital control is needed as a short term policy option
But more structural policies still required -- e.g. fiscal 20
Thank You
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GDP per capita growth and capital controlBrazil, China, Indonesia, India, Mexico, Russia, Turkey, South Africa
yhat = .217 + 4.555*restrictions_aggregate r = .279
gdpp
cgr
restrictions_aggregate.125 1
-14.2962
10.0045
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Brazil: GDP per capita growth and capital control
yhat = 2.975 + -2.995*restrictions_aggregate r = .371
gdpp
cgr
restrictions_aggregate.25 .833333
-1.44761
4.37872
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yhat = -8.459 + 23.737*restrictions_aggregate r = .264
gdpp
cgr
restrictions_aggregate.35 .5
-14.2962
6.87401
yhat = -10.979 + 17.665*restrictions_aggregate r = .619
gdpp
cgr
restrictions_aggregate.833333 1
2.16702
7.86755
yhat = -16.298 + 21.348*restrictions_aggregate r = .223
gdpp
cgr
restrictions_aggregate.833333 1
-5.03891
10.0045
yhat = .638 + .04*gdppcgr r = .8070000000000001
rest
rictio
ns_
aggr
egat
e 1
gdppcgr 9.701586.58729 9.7596
.875
1.02708
ChinaRussia
Indonesia India
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GDP per capita growth and capital controlNumber of countries = 61
yhat = 2.328 + .748*restrictions_aggregate r = .071
gdpp
cgr
restrictions_aggregate0 1
-14.2962
17.1139