EMERGING MARKETS: World Bank Latin VP supports capital controls

Trade protectionism should be avoided, but there is space for macro prudential measures when capital flows are creating asset bubbles or distorting FX markets, says Hasan Tuluy, the new vice-president for Latin America and the Caribbean at the World Bank.

“We would seek to avoid trade restrictions as they affect the consumer adversely and increase uncertainties for producers and prove difficult to roll back,” he says. There are a series of other steps that should be used before protectionism. These include fiscal policy measures, where there is space to do so, monetary policies, and selective controls on capital flows.

From the very beginning, the World Trade Association have argued in favour of free trade and he notes that the issues are not confined to Latin America as a number of countries in Europe and North America are talking about trade barriers as well, he notes. For there to be sustained, dynamic growth that brings in technology, governments globally need to reduce uncertainty in legislation, he says. 

Tuluy believes that selected capital controls can be beneficial. Significant inflows have potentially damaging effects on foreign exchange and may blow asset bubbles. Today, these two are legitimate concerns for emerging markets, which are seeing significant portfolio flows thanks to low developed world interest rates, which are needed, especially in the Eurozone.

Extra liquidity looking for strong returns invariably ends up in developing countries, such as Turkey, says the Turkish national. “[Capital] Controls are a policy tool that allow you to manage flows in a way that that does not have deleterious effects on economies,” he notes. He declined to discuss the specific case of Brazil.

In the medium- to long-term, the challenge for the region is in building productivity and competitiveness and creating predictable sets of policies that allow individuals to start investing and innovating and enhance technology transfer and skills upgrading, he believes. The World Bank must give ownership of programs to governments while involving partners from a broad spectrum, bringing in research complexes and universities.

He wants to further cooperation between his Bank and the IDB. “We do not want a competitive environment. We need to change the mindset including in our communications,” he notes. There is plenty of scope for the rich exchange of ideas in areas such as social protection programs through labor market policies, he notes. Both multilaterals are working to refine social programs with a greater emphasis on productivity enhancement. 

The World Bank will study how middle-income countries made the transition from poor countries and then share their experiences with poorer countries. With his experience in the Middle East and Africa, Tuluy is looking to bring global experience to Latin issues. Latin experiences provide valuable lessons for countries from the other side of the world in areas such as social protection and equity programs. A Pakistani delegation is visiting Mexico to find out about their family cash transfer Oportunidades program and he would like to encourage more of these international exchange missions.  

Other areas of cooperation between the World Bank and IDB include climate change and sustainability. The World Bank has launched climate investment funds which it coordinates with the regional development banks. The global bank contributes with its expertise which it shares between regions with governance shared equally between developing and developed countries, he says.

Tuluy believes that Latin economies are facing a more benign environment compared to six months ago, when the possible downside scenario was more severe. That is partly thanks to  external factors and partly highlights the resilience of Latin countries over the last decade, the  macro financial environment and social inclusion policies.

Going forward, Latin countries need to focus on the productivity and competitiveness agenda. They have done very well thanks to commodities and some productivity growth in areas such as consumer markets. “The next frontier includes plugging infrastructure and logistics gaps and building global value chains to unlock value and build on the competitive edge provided by commodities,” he notes. Latin countries need to move to more diverse economies and exports: that is the challenge of the next 10 years. Green and sustainable growth with new technologies offers opportunities for Latin America to leap ahead.

Tuluy says he has a pragmatic view of the role of the state:  it’s not about a larger or smaller state but a smarter and more effective one. He picks a Turkish example in telecommunications, noting that for 14 years landlines were the preserve of the state. Once they were opened to competition, there was a transformation in efficiency. “Suddenly, we had some of the best cell phone technology and more than 100% penetration,” he says.

He describes the arguments about the size of the state as sterile noting the absence of the state does not lead to a thriving economy. But for the state to play a positive role, it must be accountable and transparent.  

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