Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Wisnal and I'm Tracy Halloway. So, Tracy, evolution of economic thought is a big topic for us, especially this year. UM, a lot of a lot of discussion and about monetary policy, fiscal policy. Uh, one of our recurring themes, no doubt. Yeah, I mean it feels like a lot of these conversations had begun even before, but this year is kind of the one that makes everyone start taking them or at least talking about them seriously.
So things like modern monetary theory, once considered very very heterodox, are now I mean now you see certain US politicians talking about it. Uh, the idea of a greater role for fiscal policy alongside money policy. There are a lot of standard thoughts that are being overturned or at the beginning of being overturned maybe right some some stage of evolution.
We haven't really I mean, we've done a little bit, but we haven't really taken this sort of theme of evolution however, within the context of say emerging markets, or we haven't really done as much on it. We've done
a little actually, but not that much yet. Yeah. So emerging markets this year, we're pretty interesting clearly under a lot of stress because these are the countries that are dealing with a huge case load of the virus, the coronavirus, and also dealing with the economic fallout um of everything that's going on in the rest of the world. So it feels like they're sort of getting this double whammy of maybe not having as great health systems as a lot of the developed world, but still having to deal
with the economic impacts. So, you know, back in March, remember like e M looked like it was very much in trouble. Yeah, you know, I really do think and it's not exactly what we're gonna be talking about today, but I do think one of the themes from that's going to be interesting in retrospect and with pretty important implications, is whether various EMS have more policy flexibility that previously appreciated. Whether it's their ability to do quantitative easing, whether it's
their ability to run fiscal deficits. It's possible that after UM people might start to think that some e M s might have more more space to engage in countercyclical policy than previously appreciate. It. Oh, absolutely, and we're already sort of seeing that because Indonesia, I mean, who would have thought a few years ago the Indonesia would be the first central bank to do direct financing UH and
in that's entirely possible. So we are seeing some of the Yeah, so we are seeing some emerging markets experimenting with new types of policy. An are a big question, of course, and this is something that Yeah, it is a constant theme in discussions relate relate to UH control of the capital account, limiting hot money or money coming
in coming out UM. The degree to which h e M s should keep a tight leash on capital inflows and outflows is something that always gets debated, and there's always sort of a rethinking about what is the appropriate degree to which such things should be tightly controlled. Yeah, and I think I mean, for years and years and years, it was pretty clear that the international political system, I
guess had a bias against capital controls. You know, they wanted liberalization of the current account, they wanted money to flow freely between countries, and we've seen at various points in time that that's not always in the best intro
of the country itself. So you know, for instance, if you're an emerging market somewhere, and suddenly you've got this influx of hot money from abroad because people are looking for yield and they pour it all into your housing market or something like that that might not actually be what you want at that particular moment in time, an overheated housing market. So that's been an ongoing debate, and I think you're right, we're starting to see some discussion
of it again. Provides another sort of catalyst to look into this topic. Exactly right. Well, we have two very great guests. I'm excited to chat with him about this topic. We're going to be speaking with a percosh Lengani. He's assistant director and senior personnel manager in the i m f S Independent Evaluation Office. Well Is trurom Balis Supermania and a senior research officer at the i e O and I m F excited about talking to both of
them on this topic. They both recently done work on this. Uh. Prakash, thank you very much for joining us. Thanks show, It's it's great to be on this show over with you and Tracy have. I've really enjoyed listening to your podcast. Oh, thank you and sure wrong thank you as well. Hi. Guys, how are you doing? Good to be on this podcast. Very kind of both of you to say, well, let's get started, percush if you want to kick us off.
You know, we talked about evolution of thought. But for those unfamiliar, I include myself in the category just to be clear. But for those unfamiliar, what has been the sort of orthodox standard I am F view on how
to think about capital control? Okay, well, I don't want to take you too far back into history, but but you know, a pre orthodox view, actually around the time that the IMF was created, one espoused by Keynes and Harry dextra White at the U. S. Treasury, was that you could have free trade, but you needed to actually
have capital controls. So when the I m F was founded, the prevailing viewers that you actually needed capital controls, that you really couldn't have the instability that the free movement
of foreign capital might bring about. But then you had the Berlin volved falling and capitalism was the only game in town, and everyone thought, look, what this is telling us is that you know, capitalism rules, and we should just have freedom of mobility, not just of trade the way we've been having, but of the mobility of capital.
And so you know, in the early nineties, the U. S. Treasury and the i m F, I think, for understandable reasons, given the big events that had just happened, took the view that, you know, that emerging markets and others should be opening up to foreign capital and that they should be having open capital mark it's and so this was kind of the view as Tracy was describing, sort of as of as of twenty years ago, which is around the time that I I moved from the from the
FED to the I m F. So that's that's that's where things were. I mean that definitely as as Tracy was saying, sort of a bias that said, you know, capital should be free to move across countries. You really should not have capital controls. So I'm curious twenty years ago was there much discussion of the pros and cons of capital controls or to what degree was it considered economic orthodoxy that you wanted free flow of money across borders.
I think there were always some skeptics of the view that allowing capital to flow freely across national boundaries would always bring about the benefits to the recipient countries. But I would say that, you know, sort of after the fall of the Berlin Wall, there was a there was a sense of euphoria that we needed to be open to all forms of capitalism, including sort of financial capitalism
and financial globalization. So there were people like you know, Joe Stiglitz and Danny Roderick who were a bit more skeptical, or I would say quite a bit skeptical that that foreign capital would deliver benefits. But I think that most of us, I think it's sort of drunk the kool aid and and we're very much in favor of of of having sort of open capital markets. I mean, I certainly was in that camp twenty years ago. So this
might be another sort of remedial question. But I understand an extremely high abstract level what open capital accounts mean and free flow of capital, But what does that actually mean capital controls? So if you say a country has implemented capital controls or maybe a country ought to consider them, what are we typically talking about in practice in terms of creating an impediment to that free flow? Yes, so I think we're talking about things that would discriminate against
foreigners versus domestic residents. We're talking about things that would say, if you want to bring in capital for a long period of time two or three years, we will give you the following tax treatment. But if you want to bring in capital just for a short amount of time, you have to pay a higher tax. So you know, the question is I think most people recognize that there is sort of a pecking orders, as you and Tracy were kind of discussing already. I'm among the kinds of
flows of capital that you know. There are some like foreign direct investment, where I think the benefits are much more easy to demonstrate, and there is the hot money that you guys were talking about, where it's not very clear what the benefits are. And you know, no less a person than stan Fisher. I remember hearing about what he said at Jackson All conference where he said Israel's governor, he said, I don't know what possible benefits that can
be for us from short term capital flows. And you know, this is Stan Fisher, this is not, you know, just just some French French person. So I think, yeah, exactly, I think that that the impediments we're talking about are sort of discriminatory taxes to discourage foreign capital when it is viewed that it is not serving the functions described that that was subscribed, or trying to put impediments that would try to force the foreign capital into longer duration
investments rather than hot money. Can you talk a little bit about what impact capital controls can have on monetary policy of you know, a domestic emerging market. We talk a lot about the impossible trinity, or the idea that you can only have two of three things. I think it's a stable exchange rate, an independent monetary policy, and an open capital account. So you can't have all three of those at once. What are the sort of limiting factors on emerging markets when it comes to how they
control the flow of capital in and out. Yeah, So with capital controls, what emerging markets are trying to do is to sort of operate in the in the gray zone of the impossible trinity. They're kind of trying to, you know, in a way, work around it by saying, when problems get get severe, we are going to, you know, get around it by imposing controls temporarily at least in
order to manage the inflows of foreign capital. So it is indeed a way of getting around the so called impossible trinity from theory as you know, from the work of Ellen Ray and others, which I suspect you have covered in the past, emerging markets actually claim that they have an even tougher time because regardless of the exchange rate that they choose, they feel that they are sort
of helpless in the face of foreign capital. So the use of capital controls, the use of foreign exchange intervention, which I should mention is is another prominent tool that emerging markets are using. The use of these tools is a way too again as you and you were saying, kind of regain some policy space, Um, I mean, as you were saying, I mean during the pandemic, we've discovered that you know, many e M central banks have been able to march into quantitative easing, and that's been a
way of gaining some policy space. But capital controls and foreign exchange intervention are other tools that that these countries have been using in order to have some defense when there are surges of foreign capital that come into their countries driven by you know, changes in market sentiment elsewhere. So if you have risk on risk of episodes in the advanced economies, these countries are faced by huge surges
of foreign capital. And to say that, well, you should just tighten fiscal policy, or you should just let the exchange rate appreciate um and say, well that's it. That's what orthodox city tells you, and that's that's the best we can do for you. Has frankly proven not acceptable to these countries, and they have sort of innovated by you know, using capital controls on occasion, by foreign exchange intervention,
and now after the pandemic, through quantitative easing. So I think that what these countries are saying is that, you know, we can be unconventional, just as you folks in the advanced countries were, Well, I want to get to in a minute this sort of beginning of the shift you described, maybe starting twenty years ago, some rethinking why but before we do that, just for listeners, I feel like when I hear foreign capital coming in, that doesn't automatically seem
like a bad thing or risk. It's like capital, that's great money. Cash. You're like, you know, the sort of intuitive thing is it's what's it's not immediately intuitive why that would ever be a problem. Can you just walk through real quickly sort of like what is the sequence of events in the classical sort of how these things go such that an influx of foreign capital ends up creating a crisis or a problem for the recipient country.
You're absolutely right. I mean, we don't want to leave people with the impression that you know, foreign capital is is this is this terrible thing. I mean, you and I within the US live within free capital markets, within our borders, and it would be very difficult for us to be convinced that if DC and Maryland and Virginia put capital control, so this is going to make our lives much better. So so it's true that we don't want to create the impression that foreign capital does not
deliver benefits. It does. But the fact is that the global economic system is not at the point where US states are within within the United States, so the capacity to absorb foreign capital is not the same the way it is within the United States. The impact that it has on particular sectors within your economy can be quite extreme. I think Tracy mentioned the example of housing sectors within
many of these countries. So you have a flood of foreign capital coming and suddenly house prices go up in Singapore, in Canada, in Australia, in New Zealand, in in Hong Kong.
So one of the things that has happened is that countries like Canada, in Australia and New Zealand, what we think of, as you know, champions of free capital mobility, have had to put in place some men years that we would call capital controls in order to protect housing from being unaffordable in Toronto and Vancouver and Sydney and Melbourne.
So if you can, if you can imagine that these kinds of effects are happening in Canada and Australia, you can imagine what's happening in a typical emerging market country. When you're getting this huge inflow of foreign capital, you have a financial sector that may not be fully developed and cannot really perform the function of taking that capital
and matching it two good users. Often it's going to end up boosting prices in the housing sector, and from the perspective of the local residents, it's like, is this doing me any good? I mean, is it really to my benefit that house prices are going up in some neighborhoods in my cities? And so I think it's a question of absorption capacity. It's a question of how quickly the money can flow in and out. Domestic money is
still going to be with you for a while. Foreign money, at the first sign of trouble can easily leave the country and cause trouble. So I think I hope that gives you a sort of a flavor of why it is that we can be fully in favor of foreign capital, particularly where countries have a financing gap, but nevertheless, you know, question and make sure that it is actually fulfilling the
function that theory as signs it. So now that we've sort of set the scene about how people have been thinking about capital controls and why we don't necessarily want big influxes of money or outpots of money either, could you maybe talk about what what do you think is changing now? What's the spark that has set off a sort of review of this particular idea At the I m F. It's it's been an evolution, so it's I wouldn't say that there was you know, like one big
event that set off this review. I think ever since the crisis in Thailand and Indonesia and Korea and you know, in major Asian countries, there has been a rethink going on.
And what happened is that after the global financial crisis, many countries started using sort of a heterodox policy tool kit to manage surges of inflows as well as setten outflows um which led the i m F to say, look, I mean, you know, we've been thinking of moving in this direction anyway for the last twenty years, and here are all these countries after the global financial crisis, affected by this crisis, through no fault of their own, trying to use, you know, a kind of heterodox policy tool
kit to manage inflows and outflows. And so in twelve the i m F actually sort of officially changed its view on the use of capital controls. It said that, you know, it recognized that these tools were useful in some contexts and that the country should be using them when it was in their best interest to do so. And at the time this was treated as a big deal. I mean, I remember Paul Krugman saying this was a
sign of the IMF surprising intellectual flexibility. And I know that the economists wrote it up at the economists wrote it up as the relation. You know, it's like the
pope had changed the Catholic view on something. So but it was really an evolution in the direction of saying, we recognize that emerging markets are facing really grave challenges from these UH surges and sudden stops, and that in response, they're using capital controls, they're using foreign exchange intervention, and we recognize that, you know, as long as they don't completely rely solely on these tools, as long as they use you know, standard tools like monetary and fiscal policy
and exchange rate flexibility, we will be much more open to the use of these other tools in certain circumstances. So that's that was the kind of twenty twelve, not not in a global sense, but in the i MFS inside baseball sense, was a big deal. And it so our report. You know, it's like looking at the roughly the ten years after the i m F made this big change and and seeing how well and of the i m F has lived up to what it what it wanted to do in twelve. So I think that's
kind of the evolution. I think clearly the global financial crisis was a big factor, and now the pandemic is another big story. Shuro' I want to bring you in to get some of your thoughts or you know, as you sort of look back on this period um or there any sort of notable sort of country specific incidents either where a sort of new tool kit was unveiled or there was a failure to properly respond with policy
leading to crisis. Like which countries sort of or incidents sort of stand out as being particularly um educational or useful for analytical purposes. Thanks to Joe for having me um in this conversation. I think just adding to percaucious points um, some of the case country case studies that we worked on in our report across the world provided us quite a bit of a perspective on how countries deal with the issue of capital flow of capital flows
in gender. So if you take for example India, India's case, I think the two thousand thirteen tape of Trantom episode was one of the key points where we find in our report that the I m F could have responded um uh in a in perhaps a better manner to the issue of having pre emptive controls. And if you take the countries in the subs African region, which is another set of countries that we deal in our case studies,
you also find similar experiences. But I think broadly speaking from the E M world, I think it's essentially the balance between having a sequence capital account opening to ensure capital comes in, but also ensuring that financial stability risks are taken care of to the extent that um in some of our findings we see the use of preemptive capital controls as a sort of a buffer to maintain this balance. It's something that would be useful for policymakers
too kind of think about. And also, you know, wagh in a bit more on that, so that the balance between having a sequence capital account opening and having preemptive controls would would would pro the balance that's needed, especially in the emerging market space. So Joe, if I could just come in on that, I think what said sort of ties into I think the premise of what you were quizzing us on also is that you know, foreign
capital isn't bad. And as part of this report, you know, we spoke to i would say, literally a hundred or more very senior policy makers around the world, you know, in sort of confidential conversations, and I think the overwhelming feeling is that they want to remain open to foreign capital.
So as Siam was saying, kind of paradoxically, they feel that having a little having some flexibility to deal with extreme situations of surgeries or sudden stops through capital controls will actually give them the ability to keep moving towards foreign towards more open capital markets, because what they feel is that if they literally open up completely without you know, these kind of safeguards and there is a financial crisis, that actually sets back for them the cause of globalization.
Within their domestic constituencies. It becomes difficult for them to argue within their own political realm that look, let's open up to foreign capital. People say, well, look, we just had this massive financial crisis. Why why do you want us to open up. So, you know, the senior policymakers are very much in favor of open capital markets, but quite a number of them are saying, look, give us
this flexibility, we're not going to abuse it. Uh, it's not like we're going to just impose capital controls left, right and center. We just needed at specific times, and we need, frankly I m F a part at those specific times. And that will actually help us in the long run to keep moving towards more and more open capital markets, because our population will see that it's possible to keep opening up financial our capital markets without having financial crisis. And I think that was the case of
many many countries that we saw around the world. Just to add to pocacious point, I think, you know, the IMF also has to be credited in the sense especially in countries, say such as substance in substern Africa, where it was previously criticized for promoting or or advocating for a open capital account, and in recent years the FF has been fairly measured in these countries in terms of
UM advocating for open more open capital markets. To extent that you know, one of the findings that we have is that we would probably we probably feel that the IMF has a little bit more to allow or two encourage countries to open up the markets in that region. So the the i m F has made a lot of effort in recent years to balance its policies, which we also highlight in the report. Well, for your report, I think you spoke to quite a few people within the I m F UM and I guess outside as
well to get their views. What was the sort of general thinking, UM when you came to talk to them, Like, what were some of the views that you heard that that you remember and that strike you as interesting? I think, yeah, we did indeed speak to everyone within the IMF. I think, just to make it clear to your listeners, the Independent Evaluation Office is sort of part of the IMF, but as in name indicates, it's also it stays at arms
length from the I m F. It. You know, the topics we choose to investigate are decided by the office itself. We are at arms length from IMF management and it's board, so you know, we have considerable freedom to pick the topics and in depth report on them through candid conversations
with IMF staff as well as outside. So I think within the IMF, people felt that they had been in a sense, you know, sort of given their marching orders in twelve and namely that they should be more open to the use of capital controls and they should be
more cautious about just pushing for capital account liberalization. So I think most people said they knew those were the those were the orders, and they followed them, and we found that they allowed them quite well, almost to the extent as Shiram was saying, that there was almost a sense that they were not willing to take any risks in advocating that countries go for increased openness to foreign capital So you know, in China and India, some policymakers
told us that they were poised at different times where they could have made a push for more open capital markets, you know, given the political setting and the other constraints, but the i m F was cautious and following following the orders twenty twelve orders outside d i m F and we spoke to senior policymakers, they also, as Sam said, gave the IMF considerable credit for, you know, for in a sense fixing what the criticisms had been twenty years
ago after the ancient crisis. So in that sense of reframing of the i m F position was considered as moving it, as having moved it to a good place. But I think there is a feeling now that you know, even in the short space of less than ten years, things have evolved and that countries need quite a bit more policy space to deal with the challenges that they
are facing. In our report, at least, we take these views seriously and advocate that that on the one hand, you know, the IMF should not back away completely from the view that capital open capital markets are good. It should actually be perhaps even a little more aggressive on advocating capital open capital markets as a long run goal, but at the same time it should be even a little more open to the use of controls when they
are needed. Um. I mean, one example is is Iceland in twenty six you know, Iceland, as you know, had just gone through an enormous crisis in two thousand two nine. In sixteen, they wanted to impose some capital controls because there was a surge of foreign capital. The I m F said, well, yes, you folks are experiencing a surge, but look, it's not as big as what you had during the global financial crisis, and so look, you really perhaps should not be imposing these controls. And the Icelandic
authority said, that's precisely the point. We don't want to wait till what happened last time again happens. You know, this time we agree with you. The surge is not as big, but you know, frankly, we'd rather impose the controls now preemptively so that it doesn't get to the
repeat of the previous crisis. So that's the sense in which you know, the I MF needs to be still a little more open to the use of these sort of preemptive capital controls, recognizing that policymakers are have bought into the idea of open capital markets over the long run, and that they're not going to use capital controls indiscriminately. That's something else that our report found. When we did a very thorough survey of actual use of capital controls,
we found that they were not that frequent. It's just that when they are needed, countries want to use them. So let's talk about that what you just said, when they're needed, because I mean, I think I heard one time the people said, oh, the first rule of capital controls. You don't talk about capital controls because if you hint at the idea that you're going to lock money in or out of the country, then suddenly everyone tries to raise against it. So you can't just like sort of
wait till the crisis hits. And as you mentioned in the beginning of the chat, you know, it's sort of like some countries, even developed ones, have sort of very light versions of capital controls. You mentioned us Alia in Canada taking some or New Zealand taking some efforts to curve their housing markets. So what are the parameters or guide posts you look at or that one looks at.
So that a country or the I m F can evaluate when capital controls are appropriate, so that these decisions are not being made once the crisis has already started, and even the mere chatter of capital controls would only make things work. Yeah, So I mean there are a number of principles one can use. First, I think, as your question suggested, um, you know, controls on outflows are always going to be more difficult than controls on inflows.
So I mean you have to be thinking of this dynamic game and and and and saying, well, if I don't want to be in trouble during the outflows, what do I have to do now? So the question is when the third you're starting, that's when you have to think about what is it that I'm going to tell foreign investors and what is it that I'm going to be frank and clear with them about. So that's the stage when you can tell them, look, folks, we welcome
your your capital. We need it. It's going to help us, but it's not going to help us if you leave at the first sign of trouble or or anything else. So when it's coming in is when you can impose some conditions on the money coming in. So that's that. That's what I was talking about, Like, that's the stage where you could tell people, look, if you bring in money for three months, here's the tax. If you're bring
in money for two years, here's the lower tax. So if you're clear with them at the outset about what the conditions are that that would apply to them, that is something that you can do. And then at that stage people will have less of a chance to complain and say, oh, you're imposing capital controls. You said, no, look, we told you this was the tax differential tax rate that was going to prevail based on maturity, and we
are just imposing the rules. So you know, as part of this report, we actually talked to rating agencies and and other folks in global financial markets and they said that obviously what investors hate is uncertainty about what the
rules are going to be. So if if a country is sort of upfront about what the regime is going to be under which people can move money in and out, investors can live with even a somewhat more restrictive regime that says, look, I'm sorry, but the tax rate on moving money in and out over short durations is going to be much higher than if you bring in my over long durations. So I think that's something that's very
important for e M s to keep in mind. They do need the foreign capital, but they should have a fair bit of transparency in the regime, uh and not really subject that regime to you know, frequent and arbitrary changes. I think that's what foreign investors say. It is the uncertainty. I mean that said, there can be always severe stresses where during outflaw situations, countries may need to do what
they what they need to do. And I think to the extent you can predict the course of events, you should be transparent and clear with foreign investors about the regime. But as we found, for instance, in the situation that Shiram was describing, you know, India had no idea that the taper tantrum would have such a massive impact on its capital outflows. There's no way that India could have credibly told people ahead of time, look, we're not going
to touch you. It was such a severe crisis. You have the rupie depreciation depreciating like crazy in a three month period. I think there are always situations like that where countries have to do what's in their best interests. And often that's when they're looking for support from the I m F to say, look this this is this is a severe situation. The country will be using some capital controls, and I think we think that this is a good situation for it. You know China, you know,
severe stresses use capital controls. And again would have looked who was looking for strong IMF support. Just to add to that joke, I think there's also reflects on a bigger point of both institutional capacity and arbitredness. With this controls and themselves they work are just trying to say, is that we would our investors are more than happy to have a consistent set of policies which they are
you know, attuned to. So the challenge for e m s is to have a set of policies which is consistent, not arbitrary, but yet providing the necessary confidence to the market. So I think from an emerging market's point of view dealing with this crisis is that's basically the you know, besides the balance, the key is to get consistency in
their policy making. I have a slightly weird question, but to to what extent should we be viewed doing this new attitude towards capital controls as a sort of reflection of I guess, a growing recognition that there are certain parts of globalization that might not be desired. So we've seen this in various avenues of life, but I mean trade restrictions would be the obvious one. We've seen a number of countries institute trade barriers of one or another
to protect their domestic economies. Is embracing capital controls basically another way of controlling the globalized economy and trying to make it work for you better. That's that's not a weird angle at all to me. That that is, you've gotten to the essence of it, I think, which is, yes, you know, globalization is wonderful. It works for the average person, It works for most of us most of the time.
But clearly there are segments of the population too which are not seeing the benefits or are not convinced of the benefits. So that's exactly right. I mean, I think, as you said, we're seeing this with trade, which I feel is you know, really quite beneficial to the large majority of people in most countries. But I think we're seeing this particularly with financial globalization. I think people are simply not seeing the benefits that the widespread benefits across
their societies of unfettered flow of foreign capital. And I think I think paradoxically trade is getting blamed for some of the sense of financial globalization. I mean, I think these are siblings, but the wrong sibling is is drawing
the blame. I think, you know, people like Danny Roderick have talked about this and called it sort of hyper globalization, namely that we've taken a good thing and pushed it to a point where, uh, it's the benefits are not evident, some people are losing out, and we are seeing a backlash.
And I think this goes a little bit to what I was saying, that it actually allowing some flexibility in having countries stepped back a little bit from globalization is paradoxically the way that we will keep moving ahead on it, because otherwise the backlash will will actually keep us from advancing. And and as as Tracy said, we're seeing it in trade. Um, we did see a bit against financial globalization also, you know, with the kind of the Occupy Wall Street movement and
the one per centers and all that. I think that's a recognition that many people are not seeing how extreme financialization or hyper globalization is actually benefiting them. I like that. I like that phrase that you use. Siblings and so this, you know, and we think, I remember the late nineties and there's uh just so much optimism about free trade and international investments and opening up emerging markets and so forth.
And your view is like, we can have trade, and we can have the benefits of trade, even if we sort of even if country is adopted perhaps more conservative and cautious view on the sort of the financial from the financial perspective. Yeah, exactly. I think I think some amount of financial globalization has to proceed to back up the increased trade links, but it doesn't have to be necessarily to the extent that we have and particularly hot money.
And again I go back to stan Fisher. I mean, you know, if stan Fisher, when he was Governor of the Bank of Israel couldn't see what benefit he was getting from short term hot money flows, we all have to ask ourselves. I mean, you know, what what is it that these flows are doing, and if they are bringing benefits, I think it's it's something that needs to be demonstrated. So yeah, I think even for the benefits to you know, like what percosh mentions for the benefits
to flow through. For people to recognize that, I think you probably need to take a step back and and look, how you know, we need to evolve this into a more kind of a sustainable proposition so that the benefits, you know, is seeing by the people who are who are consuming. So so, just to go back to sort of the theory that we talked about at the start about why foreign capital helps, you know, one way foreign capital helps is that you know, it matches foreign capital
to deserving recipients within within the country. But what about a country where a large fraction of the people don't have bank accounts, they're not really plugged into any system
where they could draw on on this foreign capital. And that's some of the work, to its credit, that the I m F has done is on financial inclusion, and that has led to the recognition that, gum, yes, we thought foreign capital should be benefiting lots of people, but hey, what about these folks who are just completely unplugged from the financial system in their domestic economies. How how in the heck did we think they are going to benefit?
And so, you know, that's that's been part of the rethinking is to say, look, guys, we need to be not just spouting the theory. We need to think about how, you know, people on the ground are going to benefit from this foreign capital. So I think that's that's been a very salutary lesson both of you. Percash and Sharon, thank you so much for joining us. Thanks guys, thanks show, Thanks Tracy. I've always enjoyed this podcast. Good to be on it. Thanks, that means a lot, so glad to
have you both. That was a really enjoyable conversation, interesting topic. You know, it got me what we were thinking talking about at the end. You know, it definitely reminded me of our conversation earlier in the year with Matt Klein, the author of Trade Wars are classmar just this idea of unfettered trade, or particularly unfettered flow of capital, exacerbating domestic inequalities and creating a situation which you end up with a large portion of the public that just doesn't
see the benefit of sort of like openness to the world. Yeah, absolutely right. It's sort of the financialization flip side of the like hard flow of goods, isn't it. But I thought that whole discussion was really really interesting I thought, I don't know, everyone has this idea of the I m F as this really like slow and lumbering bureaucracy that never really changes its mind. But it's interesting to see the beginnings of a policy shift playing out in
real time. It's definitely a slow process, but it does seem to be happening. Yeah, it seems to be happening. And the framework or the way and your question really got at it. But the way they talked about is coherent. It's like they're not going the I m F is not any time going to give up on a general view that globalization is good, and free trade is good
and even open capital accounts are good. But tactically to get from here to there, if you move too fast, if you if countries don't have the tools to prevent crises,
then you'll never like get to that at endpoint. Yeah, I mean, I think there's a growing recognition that there if you're going to pursue globalization for all, thinking that it's going to benefit everyone, if there are pockets that aren't seeing those benefits, that are being challenged, it's okay to do sort of pinpoint policies to address what those issues are. It doesn't mean you've completely backed away from liberalizing the current account or free trade altogether, which again
is like, is a huge policy shift. Well, Tracy cannot compliment you on something. Oh, no, one. I was really impressed that on the fly you were able to remember the three the three corners of the tried Lemma or the impossible trinity as soon as you said, like, I feel like it wasn't on the fly. Oh were you were you googling it at the time. It wasn't on the I wrote it down. Well, I was, no, I wrote it down before we had this conversation. You knew
it was going to come up, right. I really thought that you just sort of extemporaneously remembered the three, uh, the three. I'm still impressed that you, like at the beginning of the conversation that you knew to have it. I'm not quite as impressed that you like wrote it down and like googled it beforehand. But it was still smart to anticipate that we were going to go there to have them at your disposal, And the way you said it, it it kind of sounded like you were like
thinking about it at the time. So it's just well done. That's because I was desperately searching for my notes to find the last one. Um, no, okay, maybe I shouldn't have said anything. Yes, Joe, I remembered it and you know it's all in my head. Okay, shall we leave it there? Yeah, let's leave it there. Okay. This has been another episode of the All Thoughts Podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway and
I'm Joe wi isn't Thal. You could follow me on Twitter at the Stalwork and you should go check out the report from our guests. There are two of the tributors the I M F Advice on Capital Flows Evaluation Report. I want to thank our guests Perkash lung Ghani and Shi ram Bala Supermanion, and be sure to follow our producer Laura Carlson. She's at Laura M. Carlson. Followed the Bloomberg head of podcast, Francesca Levi at Francesca Today and check out all of our podcasts under the handle at podcast.
Thanks for listening.