Developing countries must rule out counterproductive capital controls as the financial crisis in developed countries spreads rapidly to emerging markets, Brazilian finance minister Guido Mantega said yesterday.
I dont believe in capital control, or restriction to global trade, Mantega said. We have not considered introducing any kind of restriction: I believe it may even be unproductive. Right now it would make things worse.
Mantegas stance may indicate that large emerging markets will not resort to unorthodox policies in order to contain the impact of the crisis.
We have actually seen some capital flight, for obvious reasons, Mantega, co-chair with the US Treasury secretary Henry Paulson of the special G7/G20 meeting this weekend, said.
When you have a lack of capital in the most advanced economies and losses, there is a withdrawal of investment in emerging countries. There has been some capital flight from stock exchange and other forms of investment.
Now, as the crisis deepens, emerging markets suffer greater consequences as a result of the strong international credit crunch, which undermines foreign trade and the balance of payments of several countries due to capital flight. Some are experiencing greater difficulties such as in Eastern Europe.
In previous crises, some governments in emerging markets took drastic steps to stem capital flows, such as in Malaysia in the 1990s. Nevertheless, there is now a feeling that any prospect of capital control would scare investors away at a particularly difficult time.
Too much money has gone out already, said Richard Frank, CEO of Darby Overseas, a private equity fund. It would be unwise to start introducing capital controls when these countries need capital inflows, he said.
Meanwhile, some concern has also been expressed regarding the impact on global trade. No solution that would lead towards restricting capital flows or international trade would be useful to solve the crisis, Mantega said.
We cannot repeat what happened in the 1930s and 1940s, after the 1929 crisis, when several countries closed their borders and opted for protectionism.
We need to take advantage of domestic markets, but this should not be at the expense of international trade. Global trade is good for all countries. We need to remove the trade barriers that still exist, especially in some advanced countries, so that developing countries can increase their exports, Mantega said.
Some voices in developed countries echoed Mantegas concerns. Bill Rhodes, ceo of Citibank, said in Washington yesterday: I am concerned with the growing sense of protectionism. We have to be very careful not to forget about the world trade system.