Investment policy

Forty Years' Experience with the OECD Code of Liberalisation of Capital Movements

 

October 2002

 

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This OECD report describes the experience of OECD members in eliminating exchange and capital controls. It shows how co-operation under the rubric of the OECD Code of Liberalisation of Capital Movements, which was adopted in 1961, has supported this process.

 

This report is a timely contribution to the international debate on globalisation of financial markets, including the relevance of capital controls in today's economic and financial environment. With virtually all their restrictions on the free flow of capital now abolished, OECD members do not consider recourse to exchange controls as a viable policy tool. Indeed, in response to severe financial turbulence in emerging markets in the 1990s, Mexico, Korea and the other recent members opted for accelerating rather than suspending liberalisation.

 

The report describes the challenges that OECD members faced as they liberalised capital movements. Among these were ensuring the credibility of their macroeconomic policy, improving financial sector supervision, and building institutions. However, any difficulties were outweighed by the benefits, which included increased integration of enterprises into the world economy; wider investment choice and risk diversification for domestic savers; salutary market signals for economic policy discipline; and enhanced public sector transparency and better governance overall.

 

The OECD Code of Liberalisation has played a critical role in this process. Adherence to the Code is a central condition for OECD membership. The Code promotes the key principles of progressive liberalisation, non-discrimination among parties and transparency. Based on these principles and the Code's evolving jurisprudence, the OECD has developed standards by which members can assess their progress. In addition, the peer review process associated with the Code enables governments to learn from each other's experiences and build the capacity to carry out reform.

 

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