The Power of Banks and Multinationals

Judis: What can be done to curb the current situation? Is the damage done as it was with North American Free Trade Agreement (NAFTA)?

Rodrik: Unlike NAFTA, the problem of free capital mobility is a recurrent and on-going is important to realise that many economists including the International Monetary Fund have revisited their take on the desirability of free capital mobility and they have come to terms that there is a pertinent role for continued capital flow controls.

There have been lots of caveats. They should only be used for the purpose of last resort or the like. However, they have gone from saying every country should free up capital mobility to saying there may be a role for the control of capital. So I think that in this area, some progress has been made intellectually.

I think countries need to be willing to be much more progressive and experimental in their willingness to apply capital controls. Something else that has come to our knowledge is that it is hard to be surgically precise when you are talking about capital controls since capital, being extremely fungible, and capital controls have different ways in which they may be evaded however finely tuned or finely targeted as they may be.

Judis: Is there anything that prevents countries from imposing capital controls? What keeps them from going back to using them?

Rodrik: There is huge hesitation attributed to two main reasons. First is a genuine concern by the states that do not want to be the country that is applying capital controls when the rest are not. The shot-callers still worry that they will be stigmatized if they use capital controls.

Second on the list is the same root cause for a lot of problems that we face today, which is asymmetric political power. Whose opinion is listened to and whose is not? The interests of the banks and the multinationals have huge influence and they are simultaneously able to argue to governments and policy makes that imposing capital controls will be fairly expensive, and that they can be easily evaded. One time they use one reason, another time, they use the other. Either way, they still have a huge influence on policy makers and politicians.