G20 Finance Ministers’ and Central Bank Governors’ Meeting
Session 2: International Financial Architecture
Remarks by Angel Gurría,
14 April 2016
(As prepared for delivery)
In a situation of heighted capital flows volatility – with several emerging economies facing sizeable capital outflows, after a prolonged period of inflows – introducing capital flows restrictions may look like an appealing and politically easy short-term fix to deep-seated structural challenges.
However, capital flows restrictions – even when used with a declared macro-prudential intent – may bring severe distortions, including exchange rate misalignments, further fragmentation in the global financial system and, ultimately, increased volatility. Recent OECD research shows that, in reality, evidence on the impact of capital flow restrictions on decoupling the economy from global credit cycles is rather mixed.
It is therefore crucial that G20 countries collectively strive to resist financial protectionism and to keep financial markets open. Worryingly, OECD data suggest a sustained rise in capital flows measures since 2008, across emerging markets as well as some advanced economies.
On the other hand, governments need an actionable toolbox of policy instruments to deal with capital flows volatility, including well-calibrated macro-prudential measures that can serve as counter-cyclical buffers.
To this end the OECD Code of Liberalisation of Capital Movements, the only binding international agreement on cross-border capital flows, signed by 34 OECD and 12 G20 members, offers a very relevant policy framework to strike the right balance between these two objectives.
Thanks to its attributes of transparency and accountability, flexibility, and proportionality, the Code provides the possibility for adherent countries to reintroduce capital flows restrictions in specific circumstances, provided that the latter are regularly reviewed by policy-makers to ensure that restrictions are not maintained longer and more restrictive than necessary.
In so doing, the Code is fully aligned with the G20 Coherent Conclusions of 2011, which called for currency flow measures to be “transparent, properly communicated, and targeted to specific risks identified”.
It is therefore crucial that all G20 members actively participate in the upcoming review of the Code, in order to ensure its continued relevance and effectiveness as an instrument of co-operation in the current financial environment.