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Finance

High-Level Seminar on International Financial Architecture: “From Nanjing to Paris”

 

Plenary session remarks by Angel Gurría

Secretary-General, OECD

31 March 2016

Ministry of Finance and Public Accounts, Paris

(As prepared for delivery)

 

 

Ministers, Governors,

Ladies and Gentlemen,

 

As you all know well, this meeting comes at a time of great uncertainty for the state of the world economy, with pick-up in growth remaining largely elusive - as I reported to you in Shanghai a few weeks ago.

 

Threats to financial stability and volatility have been on the rise, and a number of emerging markets face vulnerabilities linked to currency exposures and/or high domestic debts.

 

After strong capital inflows, several of them are now faced with sizeable capital outflows: the risk of “sudden stop” cannot be ruled out – and as the banker’s adage says, “it is not speed that kills, it is the sudden stop”! [as quoted by Dornbusch, Goldfajn and Valdés in a 1995 Brookings paper on the tequila crisis]

 

Resisting the appeal of financial protectionism while equipping governments with a robust policy framework for managing capital flows  

 

In this challenging context, capital flow restrictions may look like an appealing proposal for policy makers – all the more that they may constitute a politically easy short-term fix to deep-seated structural challenges that would actually require painful medicines.

 

Those easy fixes are likely to be “smoke and mirrors” however: even when used with a declared macro-prudential intent, they may bring an additional layer of more severe distortions, including exchange rate misalignments, more fragmentation in the global financial system and, ultimately, increased volatility. Recent OECD research actually shows that evidence on the impact of capital flow restrictions on decoupling the economy from global credit cycles is rather mixed.

 

We actually need to balance two objectives:
 

  • On the one hand, we should collectively strive to keep financial markets open. Combined with a sound regulatory framework, open capital markets support a better risk allocation, lower the overall cost of capital and ultimately foster a deeper global liquidity. This is no coincidence that China and other large emerging economies have adopted long-term plans to liberalise their capital accounts. However, OECD indicators suggest a worrying rise in capital flow measures since 2008 - often in the form of currency-based restrictions - together with a decrease in financial openness - as reflected by increased domestic saving-investment correlations. This is reversing an historic trend and should be a cause for concern.

 

  • On the other hand, governments need an actionable toolbox of policy instruments to deal with capital flow volatility. Clearly, a sound policy framework must be established in order for an economy to fully benefit from a liberal, open capital account regime - this is the key lesson we drew from successive financial crisis over the last two decades. This framework can include well-tested and calibrated macro-prudential measures that can serve as counter-cyclical buffers. Even if such measures may have costs in terms of distortions within the financial system, they may be needed to balance the cost of a single, large, and outright banking crisis.

 

The role of cooperation to support openness as a feature of the international financial architecture: the OECD Code shows the way

 

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 achieve and strike the right balance between these two objectives: It offers the possibility and flexibility to adherent countries of reintroducing capital flow restrictions in specific circumstances, provided the latter are regularly reviewed by policy-makers to ensure that restrictions are not maintained longer and more restrictive than necessary.

 

In other words, the Code provides the following trilogy - transparency  and accountability, flexibility, and proportionality - which is key to reconciling governments need for concrete policy tools with the quest for open and integrated international capital markets.

 

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 can also constitute a very useful policy tool and mechanism in a context of future “tectonic shifts” in the international financial architecture, including the move from large emerging market economies towards full capital account convertibility. The latter will require more, not less, international transparency, accountability, and cooperation in order to bring about global growth and stability.

 

The OECD is now embarking on a review of the Code with the purpose to ensure its continued relevance in a fast-evolving international financial architecture. We will report to next G20 Finance meetings in April in Washington in more detail. But let me stress that, together with widening adherence, the review of the Code is an opportunity to transform the vision of the transparent, open and resilient world we want, into a reinvigorated multilateral agreement. All G20 members are welcomed and encouraged to participate actively in this review to design better financial policies for better lives.

 

 

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