WASHINGTON — Representatives of emerging nations rebuffed an International Monetary Fund plan to guide them on managing huge flows of capital into their economies, viewing it as a way to constrain their actions rather than help.
The IMF's policy-steering committee, at its spring meeting over the weekend, responded by effectively delaying the plan, which would influence the use of capital controls—tools such as taxes and restrictions on foreign investment. The committee agreed to study the issue more in coming months.
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The IMF's recent endorsement of capital controls marked a reversal in its longstanding opposition to limits on the free flow of capital around the world. IMF officials had come to acknowledge emerging markets' need to curb surging inflows, which can fuel asset bubbles and inflation and hurt domestic exporters by driving currency values higher.
The IMF's plan would have encouraged nations to treat capital controls as a last resort, after they had first tried use other tools, such as policies on interest rates, currency values and government budgets.
But ministers of developing economies resisted vehemently, viewing the proposal as an effort by advanced economies to hamstring their policies. Brazil, Turkey, South Korea and several other developing countries have adopted capital controls over the past year to limit surging inflows.
"We oppose any guidelines, frameworks or 'codes of conduct' that attempt to constrain, directly or indirectly, policy responses of countries facing surges in volatile capital inflows," Brazil's finance minister, Guido Mantega, told the IMF's steering-committee meeting.
The fight over capital controls comes amid a continuing battle over who is to blame for the flood of capital flowing primarily from sluggish advanced economies into faster-growing developing countries.
Developing countries blame the U.S. Federal Reserve, in particular, as a fountain of excess capital because it is holding short-term interest rates near zero and pumping money into the economy by buying government bonds. Developed countries trace the problems primarily to China's policy of tightly controlling its currency's value, and also to the tendency of investment capital to flow to the economies with the fastest growth.
The IMF committee directed the fund to study the issue with more focus on the sources of capital inflows.
Mr. Mantega called capital controls "self-defense" measures. "Ironically, some of the countries that are responsible for the deepest crisis since the Great Depression, and have yet to solve their own problems, are eager to prescribe codes of conduct to the rest of the world, including to countries that are overburdened by the spillover effects of the policies adopted by them," he said in a statement to the policy committee.
U.S. Treasury Secretary Tim Geithner called the IMF proposal a "good start." He blamed the currency policies of countries such as China, saying they drive capital into economies with freer exchange rates.
"A few emerging markets run tightly managed currency regimes, deploying extensive capital controls and accumulating excess reserves well beyond precautionary levels," he said. "This asymmetry magnifies capital flows into emerging markets with open capital accounts, heightening upward pressure on exchange rates that are flexible and fueling inflation in economies with managed, undervalued exchange rates."
The IMF had opposed capital controls for decades. Nations employing them risked criticism from the fund, spurring resentment from some members who feared a stigma from investors or other nations.
But the IMF stance has shifted in recent years amid huge volumes of "hot money," or short-term flows, into many economies.
"All those who think that the capital controls may be useful should be happy," IMF Managing Director Dominique Strauss-Kahn told reporters ahead of the meeting. "But, you know, human mechanics are sometimes a bit difficult to understand."
The IMF's framework for using capital controls, if adopted, would likely carry little force outside countries receiving IMF loans. However, some nations worry they might be judged negatively during the fund's review of members' economies if they don't follow the guidelines.
Proponents of the IMF plan say it is largely designed to establish a shared understanding around the use of capital controls. "It's never going to be a hard set of rules with sanctions," said Angel Gurria, head of the Organization for Economic Cooperation and Development, which represents the U.S. and other advanced economies. "It's not a question of stopping countries from doing whatever they feel they need to do. It's about creating a comfort zone."
—Ian Talley,
Matthew Cowley and Bob Davis
contributed to this article.
Matthew Cowley and Bob Davis
contributed to this article.
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