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Professor Bhagwati Warns on Risk of Penalizing Developing Countries For Implementing Capital Controls In Response to US-Chile Free Trade Agreement
Mar 18, 2003

Jagdish Bhagwati and Daniel Tarullo, professor of economics at Columbia University and professor of law at Georgetown University respectively, published in the FT an article commenting on the inclusion of restrictions on the use of capital controls in the trade agreements that the US is studying to sign with Chile and Singapore.

They called the attention that free flows of capital can bring panic and crashing markets and currencies, particularly in developing countries. They argued that developing countries have relatively small financial markets and do much of their borrowing in dollars or euros, making them vulnerable to rapid financial outflows if creditors suspect difficulties in repayment.

According to them, persistent lobbying by some financial interests and the swing away from interventionism to greater use of markets combined to induce amnesia at the International Monetary Fund about the need for emerging markets to exercise prudence in freeing capital flows. Still they said to believe that the Asian financial crisis had helped to change the IMF’s thinking on careful policies that monitor and, if necessary, regulate capital flows.

Therefore, they rejected the Bush administration persistent view that the free trade areas for Chile and Singapore should include provisions penalising them for the use of any controls on capital and called as a once more “discouraging triumph of ideology over experience and good sense”. In the aftermath, the writers pointed that the use of these two agreements as "templates" for other trade agreements, possibly including the Doha round, meant that acceptance of the capital control provisions could engender a trade policy that caused far-reaching damages.

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