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Contents

  1. Modern Diplomacy
  2. 1 Introduction
  3. Imf financial sector expert salary

Capital flows resumed into the Brazilian economy in the early nineties. As many other developing countries, Brazil benefited from favorable external factors. The main determinant of foreign capital flows has been the huge interest rate differential between the domestic and the international markets.

The liberalization of exchange flows and the renegotiations of the foreign debt allowed the Brazilian economy to be one of the main recipients of foreign capital flows. The success of the current stabilization plan — the Real Plan — has strengthened this trend. The idea is to maintain a large volume of reserves so that it works as a short-term insurance policy of the exchange rate, which anchors the new currency.

Nevertheless, the large volume of capital flows has prompted the government to try to fine-tune its size and composition.

The high interest rate differential, which is maintained to guarantee the domestic consistency of the stabilization plan until further fiscal reforms are enacted, has attracted massive flows of short-term speculative capital. Domestically, a policy of strict control over the foreign reserves has been adopted, as well as a policy for exports increase.

Following a trend common to other emerging markets, private capital inflows to Brazil disappeared in the s and increased dramatically after Positive balances were only achieved from onwards. According to Mello, in the s, one of the characteristics of these capital flows was that they consisted mostly of voluntary bank credits. Later, with the outbreak of the debt crisis, this type of financing was replaced by other forms of capital inflow, particularly resources from multilateral organizations and government agencies.

With the dawn of the s, foreign resources inflows based on security issues came to account for a considerable share of outside capital and supplanted bank credits. Taken as a whole, the resources obtained through commercial papers, bonds, notes and securitization accounted for Since , net foreign capital flows to Brazil have been sufficient to finance small current account deficits while contributing to an increase in foreign reserves.

During that period, the capital consisted primarily of short-term resources tied to portfolio investments and other short-term investments. In table 2, the composition of capital flows is shown. There is the declining share of medium- and long-term capital flows lines d and e and the growing importance of short-term capital lines c and f in total private capital flows. It is also shown that the share of net direct investment including reinvested profits, lines a and b in total private capital flows oscillated between and Mello highlights the importance of foreign portfolio investments.

Still according to Mello, despite the fact that specific legislation on foreign investments in Brazilian security exchanges dates to Law , issued in March , only with the advent of Resolution , on March 20, , were the first incentives offered to foreign investors in the Brazilian stock market. The appendices to this document define the mechanisms that discipline the creation of foreign capital investment companies Appendix I , investment funds Appendix II , diversified stock portfolios Appendix III , and stock and bond portfolios operated in the country by institutional investors Appendix IV , and finally, investments through depositary receipts Appendix V.

These institutional alterations, together with the low prices of Brazilian stocks and the exogenous factors, generated a huge volume in foreign portfolio investments in Brazil in the s.

Modern Diplomacy

When the crisis erupted, the initial reaction of investors suggested that the Mexican financial crisis would compromise all emerging markets, as stock prices plunged, particularly in Argentina and Brazil; currencies weakened in developing countries from Thailand to Bulgaria, and foreign portfolio investment disappeared. This infusion of capital successfully insulated financial markets from the crisis and soon capital also returned to Brazil.


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The Balance of Payments in see table 3 is characterized by the high absorption of long-term foreign capital, such as foreign direct investment, and also by a dramatic amortization of long- and short-term external liabilities. Oscillation in the level of foreign reserves was also observed starting in October , when the crisis erupted in Southeast Asia.

During the most critical period, October and November , the Central Bank had to provide foreign currency not only for both the floating and the free exchange rate markets. This shows the autonomy of the absorption of long-term-risk capital, related to the privatization process. This was due to the strong outflows that occurred during the fourth quarter of , as an effect of the Asian crisis. Portfolio investments include financial funding for the stock markets under the regulation described in the Appendices I to V of the Resolution , and also for the fixed-yield funds: foreign capital, privatization funds, real estate investment funds and mutual investment funds in emerging companies.

According to Mathieson and Rojas-Suarez, there are basically four reasons for using capital controls:. They are also used to control the form of capital inflows: to limit short-term inflows while attracting long-term flows, like in Chile. It has been argued that the authorities should limit speculative capital flows rather than alter financial and macroeconomic policies designed to achieve medium-term objectives.

A second reason for the use of capital controls is the need of developing countries both to ensure that scarce domestic savings are used to finance domestic investment rather than the acquisition of foreign assets and to limit foreign ownership of domestic factors of production. The uncertainties created by an unstable macroeconomic and political environment in many developing countries can reduce the expected private returns of holding domestic financial instruments far below the social marginal product of additional capital.

It has been argued that capital controls can be used to help retain domestic savings by reducing the return on foreign assets e.

1 Introduction

Even if capital controls limit the acquisition of foreign assets, however, they still might do little to increase or sustain the availability of savings for domestic capital formation. If domestic financial instruments carry relatively uncertain and low real rates of return and residents cannot acquire foreign assets, they usually respond either by reducing their overall level of savings or by holding their savings in inflation hedges such as real estate or inventories. Capital controls may also be used to establish limits on foreign ownership of domestic factors of production, industries, natural resources and real estate.

On the other hand, they may also discourage foreign direct investment. Stamp duties and taxes on securities transactions have often been important sources of government revenues in countries with large securities markets like Switzerland, for instance , and income taxes on interest and dividend income are key components of most tax systems. Finally, it has been often recommended that a opening of the capital account should occur late in the sequencing of stabilization and structural reform programs in developing countries in order to avoid capital flows that would make reform unsustainable.

The nature of such destabilizing capital flows would depend on both the credibility of the reform program and the extent of the differences in the speeds of adjustment in goods, factor and financial markets. For example, if a stabilization program lacks credibility, the liberalization of the capital account could lead to currency substitution and capital flight, which could trigger a balance of payments crisis, devaluation and also inflation.

Conversely, if it is anticipated that the reform program will be sustained, then there could be a capital inflow due to higher perceived return on domestic assets that would lead to a real exchange rate appreciation that could offset the effects of the trade reform on domestic traded goods prices.

Moreover, even if there was some uncertainty about the likely success of the reform program, capital inflow could occur if residents temporarily repatriate funds from abroad to take advantage of the high real interest rates. Cardoso and Goldfajn state that the desire to counteract the pressures to exchange rate appreciation in the face of large capital inflows and to limit inflows that are likely to be reversed has led to central bank intervention.

Policies to reduce the impact of capital inflows include direct intervention through controls and taxes and a restrictive monetary policy in the form of sterilization. The instability caused by heavy inflows and the costs of sterilization seems to give governments a reason to control capital flows. Still according to Cardoso and Goldfajn, one of the most convincing arguments in favor of the use of capital controls was advanced by Dooley He argued that large private capital inflows to developing countries have reflected a chain of official guarantees consisting of a commitment to an open capital account, the adoption of a fixed exchange rate or limited flexibility and the guarantee that the authorities would help stabilize the domestic financial system during a crisis.

The financial system guarantees include a lender of last resort provision, bank deposit insurance, and interventions in equity markets to limit price declines. If the guarantees lead inflows to a poorly supervised financial system, then poor quality investments may occur. The solution to this problem lies in breaking the chain of guarantees offered to international investors this can also be viewed as a modern rationale for the use of capital controls.

Dooley regards a threat to withdraw the guarantee of the bank deposits or the solvency of the banking system as not credible. This leaves either changing the exchange rate regime which can be an alternative, depending on the country and on the time or imposing capital controls as the only options, if countries do not want domestic interest rates to be determined by international markets. Besides the arguments for the use of the capital controls, a strong tradition argues that government intervention does not accomplish its stated objectives.

There is the question whether the costs include the possibility of retaliation by other countries, evasion, administrative costs, and the inability to quantify the needed tax on capital flows. There is also the risk that controls established to mitigate a temporary distortion may generate interests of their own and outlive their purpose.

Controls on capital flows may take on the form of restrictions on the assets transactions or restrictions on payments related to the acquisition of assets. Restrictions on assets transactions include direct capital controls, such as quantitative limits or prohibition of certain transactions by imposing minimum maturity limits. Price-based capital controls take the form of taxes or reserve requirements.

In response to the mids capital outflows, Venezuela introduced comprehensive exchange controls to limit current and capital account transactions. Romania responded to its balance of payments crisis of early by effectively closing foreign exchange markets. These countries also used price-based controls. For instance, Brazil raised the financial transaction tax to discourage inflows in the s.

Imf financial sector expert salary

Chile introduced a stamp duty in the mid and extended the base tax to all foreign loans. Financial regulatory measures and prudential measures can also affect capital movements.


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  7. China, India, Korea, and Thailand differentiate their reserve requirements between resident and nonresident deposits in a way that can influence capital movements in some cases. Appleyard and Field comment on a major proposal that has attracted attention for some time is that of James Tobin , who suggested imposing an international tax on all spot transactions involving the conversion of one currency into another in securities markets.

    Such a tax would presumably discourage speculation by making currency trading more expensive, thereby reducing the volume of destabilizing short-term capital flows. However, on one hand the tax has the potential advantages of reducing some of the marginally based speculative transactions or market "noise" and of fostering international cooperation on tax policy, on the other hand there are a number of problems with a transactions tax of this type.

    There are four main problems with a Tobin tax that would inhibit its effectiveness. First, to limit the market distortions resulting from such a tax, the tax base would have to be as broad as possible and would have to exclude no category of market participants. However, the Tobin tax cannot distinguish between normal and institutional trading which ensures market liquidity and efficiency and destabilizing financial activity.

    Second, there is the question of what type of transaction to tax. If the tax is applied only to spot transactions, it can easily be avoided by going into the derivatives market. Taxing the initial contractional value of derivatives, however, would likely severely injure the derivatives market. Finally, there is the question of the distribution of revenues, which is a controversial political question within countries.

    Alternative models have been suggested by other economists, but there is still a lack of consensus among them, suggesting that such a measure is unlikely to be adopted in the near future. They also point out that another approach to controlling capital flows involves adopting a system of dual exchange rates or multiple exchange rates. In this situation, a different exchange rate is employed depending on the nature of the foreign transaction. This way, a considerably higher price for short-term capital transaction would presumably discourage such transactions.

    The ability of quantitative capital controls or a dual exchange rate system to insulate domestic financial conditions from those in international financial markets is naturally influenced by the expected gains from and costs associated with evading the controls. The incentives to evade capital controls will reflect not only nominal yield differentials including expected exchange rate changes but also differences in the availability of credit, the types of financial products and services that are provided, and the perceived stability and soundness of the financial institutions in domestic and offshore markets.