Capital flows are an integral component of international finance. They allow for savings to be channelled from surplus countries to deficit countries, where returns to investment are typically higher. However, these flows can also pose important challenges to open economies. Excessive inflows can lead the economy to overheat and fuel credit and asset price bubbles. Sharp reversals in capital inflows are disruptive. This has triggered renewed interest in the use of capital controls.
The G20 is discussing ways to help countries make the most of capital flows. The OECD’s Code of Liberalisation of Capital Movements is an important contribution to this debate.
The Code of Liberalisation of Capital Movements was born with the OECD in 1961 at a time when many OECD countries were in the process of economic recovery and development and when the international movement of capital faced many barriers.
For 50 years, the Code has provided a balanced framework for countries progressively to remove barriers to the movement of capital, while providing flexibility to cope with situations of economic and financial instability.
Revised governance arrangements announced in July 2012 mean the Code is now open to adherence by all interested countries.