Group of Lecce 2013Group of Lecce 2013Global Finance Between Rigor and Growth:

Which Implications for International Governance?Global Finance Between Rigor and Growth:

Which Implications for International Governance?

Financial Stability and the WTO

Annamaria ViterboUniversity of Torino

“It is widely held out that control of capital movements, both

inward and outward, should be a permanent feature of the post-

war system”.

John Maynard Keynes

(Draft Plan, 11 February 1942)

Purpose:

• to investigate the consistency between IEL (and WTO law in particular) and measures adopted by States to contrast the financial crisis

Focus on:

•capital flow management measures (CFMs) and macro-prudential measures and the GATS legal framework

Purpose:

• to investigate the consistency between IEL (and WTO law in particular) and measures adopted by States to contrast the financial crisis

Focus on:

•capital flow management measures (CFMs) and macro-prudential measures and the GATS legal framework

Financial Stability and the WTOFinancial Stability and the WTO

Capital controls, on outflows and inflows, have been used both as:

• preventive measures, to mitigate the harmful effects of large capital inflows (together with the strengthening of macro-prudential supervision)

• emergency measures, to contrast capital flight and pressures on the exchange rate

Capital controls, on outflows and inflows, have been used both as:

• preventive measures, to mitigate the harmful effects of large capital inflows (together with the strengthening of macro-prudential supervision)

• emergency measures, to contrast capital flight and pressures on the exchange rate

Capital ControlsCapital Controls

IMF “new institutional view”IMF “new institutional view”

IMF (2012a), Liberalizing Capital Flows and Managing Outflows

IMF (2012b), The Liberalization and Management of Capital Flows: An Institutional View:

“There is no presumption that full liberalization is an appropriate goal for all countries at all times”.

IMF (2012a), Liberalizing Capital Flows and Managing Outflows

IMF (2012b), The Liberalization and Management of Capital Flows: An Institutional View:

“There is no presumption that full liberalization is an appropriate goal for all countries at all times”.

Other IEL actors support the IMF’s new institutional viewOther IEL actors support the IMF’s new institutional view• Stiglitz Report, background document to

the UN Conference on the World Financial and Economic Crisis (21 September 2009)

• UNCTAD, Trade and Development Report (2011), p. 99-102

• G20 of Cannes, Coherent conclusions for the management of capital flows, (2011)

• UN General Assembly, Resolution AG/67/197 (Dec. 2012)

• Stiglitz Report, background document to the UN Conference on the World Financial and Economic Crisis (21 September 2009)

• UNCTAD, Trade and Development Report (2011), p. 99-102

• G20 of Cannes, Coherent conclusions for the management of capital flows, (2011)

• UN General Assembly, Resolution AG/67/197 (Dec. 2012)

How the IMF’s new institutional view will be usedHow the IMF’s new institutional view will be used

The IMF is now ready to recommend the use of capital controls in the following contexts:

•policy advice

•bilateral surveillance

•multilateral surveillance

The IMF is now ready to recommend the use of capital controls in the following contexts:

•policy advice

•bilateral surveillance

•multilateral surveillance

The limits of the IMF’s new institutional viewThe limits of the IMF’s new institutional view“The Fund’s proposed institutional view would

not (and legally could not) alter members’ rights and obligations under other international agreements. […] Thus, for example, even where the proposed Fund institutional view recognizes the use of inflow or outflow CFMs as an appropriate policy response, these measures could still violate a member‘s obligations under other international agreements if those agreements do not have temporary safeguard provisions compatible with the Fund‘s approach (IMF, 2012b, par. 42).”

“The Fund’s proposed institutional view would not (and legally could not) alter members’ rights and obligations under other international agreements. […] Thus, for example, even where the proposed Fund institutional view recognizes the use of inflow or outflow CFMs as an appropriate policy response, these measures could still violate a member‘s obligations under other international agreements if those agreements do not have temporary safeguard provisions compatible with the Fund‘s approach (IMF, 2012b, par. 42).”

The IMF’s guidanceThe IMF’s guidance

“The IMF’s institutional view could help foster a more consistent approach to the design of policy space for CFMs under bilateral and regional agreements. […] members drafting such agreements in the future, as well as the various international bodies that promote these agreements, could take into account this view in designing the circumstances under which both inflows and outflows CFMs may be imposed within the scope of their agreements” (IMF, 2012b, par. 33).”

“The IMF’s institutional view could help foster a more consistent approach to the design of policy space for CFMs under bilateral and regional agreements. […] members drafting such agreements in the future, as well as the various international bodies that promote these agreements, could take into account this view in designing the circumstances under which both inflows and outflows CFMs may be imposed within the scope of their agreements” (IMF, 2012b, par. 33).”

The GATS legal frameworkThe GATS legal framework

Art. XI (Payments and Transfers):

after undertaking market access and NT commitments for specific service sectors, a State has to liberalize the connected current and capital movements

Footnote 8 to Art. XVI (Market Access):

capital controls on both inflows and outflows are prohibited for financial services provided under Mode 1 and for all services provided under Mode 3

Art. XI (Payments and Transfers):

after undertaking market access and NT commitments for specific service sectors, a State has to liberalize the connected current and capital movements

Footnote 8 to Art. XVI (Market Access):

capital controls on both inflows and outflows are prohibited for financial services provided under Mode 1 and for all services provided under Mode 3

GATS safeguard clausesGATS safeguard clauses

• Art. XI:2: capital controls can be introduced at the request of the IMF

• Art. XII:1: in the event of a BoP crisis and once a list of requirements is met, Members are allowed to introduce controls on capital outflows (unclear whether applicable also on inflows)

• FSA Art.2(a): Members are allowed to introduce prudential measures irrespective of their specific commitments

• Art. XI:2: capital controls can be introduced at the request of the IMF

• Art. XII:1: in the event of a BoP crisis and once a list of requirements is met, Members are allowed to introduce controls on capital outflows (unclear whether applicable also on inflows)

• FSA Art.2(a): Members are allowed to introduce prudential measures irrespective of their specific commitments

The GATS ex ante coordination clause with the IMF legal framework

The GATS ex ante coordination clause with the IMF legal framework

Art. XI:2: Nothing in this Agreement shall affect the rights and obligations of the IMF members [...], provided that a Member shall not impose restrictions on any capital transactions inconsistently with its specific commitments regarding such transactions, except under Art. XII or at the request of the IMF.

Art. XI:2: Nothing in this Agreement shall affect the rights and obligations of the IMF members [...], provided that a Member shall not impose restrictions on any capital transactions inconsistently with its specific commitments regarding such transactions, except under Art. XII or at the request of the IMF.

The GATS BoP clauseThe GATS BoP clause

Art. XII:1: in the event of a serious BoPs and external financial difficulties or threat thereof, a Member may adopt or maintain restrictions on trade in services on which it has undertaken specific commitments, including on payments or transfers for transactions related to such commitments.

MAI Temporary Safeguard clause: where in exceptional circumstances, movements of capital cause, or threaten to cause, serious difficulties for macroeconomic management, in particular monetary and exchange rate policies…

Art. XII:1: in the event of a serious BoPs and external financial difficulties or threat thereof, a Member may adopt or maintain restrictions on trade in services on which it has undertaken specific commitments, including on payments or transfers for transactions related to such commitments.

MAI Temporary Safeguard clause: where in exceptional circumstances, movements of capital cause, or threaten to cause, serious difficulties for macroeconomic management, in particular monetary and exchange rate policies…

The GATS BoP clause (2)The GATS BoP clause (2)

Art. XII:2: The restrictions shall:

• not discriminate among Members,• be consistent with the IMF Articles,• avoid unnecessary damage,• not exceed those necessary to deal with the circumstances,• be temporary and phased out progressively.

Art. XII:2: The restrictions shall:

• not discriminate among Members,• be consistent with the IMF Articles,• avoid unnecessary damage,• not exceed those necessary to deal with the circumstances,• be temporary and phased out progressively.

The GATS Prudential Carve-OutThe GATS Prudential Carve-Out

FSA Art.2(a): Notwithstanding any other provisions of the Agreement, a Member shall not be prevented from taking measures for prudential reasons, including for the protection of investors, depositors, policy holders or persons to whom a fiduciary duty is owed by a financial service supplier, or to ensure the integrity and stability of the financial system. 

Where such measures do not conform with the provisions of the Agreement, they shall not be used as a means of avoiding the Member’s commitments or obligations under the Agreement.

FSA Art.2(a): Notwithstanding any other provisions of the Agreement, a Member shall not be prevented from taking measures for prudential reasons, including for the protection of investors, depositors, policy holders or persons to whom a fiduciary duty is owed by a financial service supplier, or to ensure the integrity and stability of the financial system. 

Where such measures do not conform with the provisions of the Agreement, they shall not be used as a means of avoiding the Member’s commitments or obligations under the Agreement.

The GATS as a Model for the ISAThe GATS as a Model for the ISA

International Services Agreement (ISA):

a plurilateral agreement or a GATS Art. V services integration agreement, to further liberalize trade in services without concluding the multilateral trade negotiations of the WTO

International Services Agreement (ISA):

a plurilateral agreement or a GATS Art. V services integration agreement, to further liberalize trade in services without concluding the multilateral trade negotiations of the WTO