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Managing Capital Flows in Emerging Markets




zhuMin Zhu, Special Advisor to the Managing Director,
International Monetary Fund
This is, of course, a very topical subject—not least here in Brazil which, like many other emerging market economies (EMEs), has been contending with large capital inflows over the past couple of years. While the subject is topical, it is by no means ephemeral or new.

Investors worldwide have woken up to the exciting growth opportunities in emerging market countries, and despite fluctuations from time to time, robust capital flows to EMEs will likely be a structural characteristic of the global financial markets for many years to come.
And I need hardly remind this audience of eminent policy makers, academics, and practioners, that this subject has a long history to which, indeed, many of you have made critical contributions. What I would like to do in my remarks this morning is to give a brief overview of some of the thinking at the Fund on this issue, what it means for emerging market economies in Latin America, and how we hope to take the work agenda forward.

Some History

First, a little history. Since I am still relatively new to the Fund—having assumed my duties just over a year ago—I began reading up on what the Fund has been saying over the years about managing capital flows. While the subject has, at times, been contentious, my own sense is that, by and large, the Fund has tended to be open minded and pragmatic, rather than dogmatic, on this topic.1
The issues, in fact, have been discussed since the very earliest days of the Fund. This year happens to be the seventieth anniversary of the debate between John Maynard Keynes and Harry Dexter White, which is perhaps a natural starting point for us. It makes for fascinating reading.2 It is often assumed for example that Keynes favored capital controls, White opposed them, and that the Fund’s Articles of Agreement are an uneasy compromise between these two great minds. But that is too simplistic a reading of history. In fact, both men recognized that capital flows can bring tremendous benefits for investment and growth—but also that inflow surges and sudden stops can bring risks of economic dislocation.

Since Keynes’ views are generally known, I will not linger on them except to remark that, when drawing up his Plan for the IMF in 1941, Keynes went out of his way to emphasize the need for the post-war system to “greatly facilitate the restoration of international loans and credits for legitimate purposes.”

White, the American, took as his starting point that “the desirability of encouraging the flow of productive capital to areas where it can be most profitably employed needs no emphasis.”

But he was also open to the idea of some controls under specific circumstances. When submitting his doctoral dissertation to Harvard University in 1930, White had written that “some measure of the intelligent* control of the volume and direction of foreign investments is desirable.”

In his Plan for the IMF, White developed the argument further, writing that:

“There has been too easy an acceptance of the view that an enlightened trade and monetary policy requires complete* abandonment of controls over international economic transactions. There is a tendency to regard foreign exchange controls, or any interference with the free movement of funds as, ipso facto, bad … [But] there are times when it is in the best economic interest of a country to impose restrictions on movements of capital…[and] there are periods when failure to impose controls…have led to serious economic disruption.”

Therefore, White concluded “the task before us is not to prohibit instruments of control but to develop those measures of control, those policies of administering such control, as will be the most effective in obtaining the objectives of world-wide sustained prosperity.”*3
It is very much in this spirit that we, at the Fund, have been working over the past couple of years to develop our policy advice on how best to manage capital flows.

Toward an intelligent response to capital flows

Recognizing that once the global financial crisis had passed, capital flows would resume rapidly, researchers at the IMF started thinking about these issues in the fall of 2009, publishing a first paper in early 2010,4 followed by further analytical work in a Staff Discussion Note5 early this year (which Mr. Ostry will discuss tomorrow), as well as papers looking more closely at, and drawing upon, country and regional experiences6. These various strands fed into a paper that carries the institution’s imprimatur and lays out a possible framework for considering these issues.7

I hope that this framework, and the analytical thinking that underpins it, while preliminary, will give us a good basis for providing policy advice to emerging market countries facing surges of capital inflows. It meets, I think, White’s criteria of an “intelligent” response, and of helping to develop measures that “will be the most effective in obtaining the objectives of world-wide sustained prosperity.”
The basic ideas are grounded in sound economic principles, namely:

  • Policy interventions should be as closely aligned to the problem at hand as possible, (which may, at times, mean removing home-grown distortions that amplify inflows);
  • The magnitude of the interventions should be commensurate with distortions they are trying to address;
  • In setting policies, each country also needs to take into account the spillovers and multilateral consequences of its actions.

In the context of managing capital flows, this means that countries will want to first exhaust their macro policy options, which include:

  • allowing the exchange rate to appreciate unless it is overvalued and/or external stability is at risk;
  • accumulating reserves in line with country insurance metrics;
  • adjusting the monetary/fiscal policy mix by tightening fiscal policy to maintain a sustainable pace of demand growth and, if conditions permit, lowering policy interest rates

These steps need to be taken before imposing capital controls or prudential measures that may act as capital controls (together referred to as capital flow management measures). This logical primacy of the macroeconomic response helps countries: (i) reap the benefits of capital flows while safeguarding against the risks; (ii) stem the inflow pressures by reducing the incentives for capital to cross the border; and (iii) ensure they are not avoiding external adjustment that may be necessary from a national or multilateral perspective.
This is general advice; of course, it must be tailored to country-specific characteristics. If I may nevertheless generalize a bit, I think that current circumstances make this policy advice especially pertinent for emerging market economies in Latin America:

  • First, history suggests that the unusually favorable external environment is conducive to very high domestic demand growth and a buildup of vulnerabilities in the region.
  • Second, the region is also facing a second tailwind—it is benefiting not only from easy financing conditions but also high terms of trade. Very strong commodity exports create issues of overheating and managing good times that are in many ways similar to capital inflows.
  • Third, unlike Asia, current accounts in Latin America are already in deficit and though these deficits have not reached dangerous levels they can rapidly move to vulnerable positions as domestic demand reacts exuberantly.
  • Finally, the region’s capital accounts tend to be more open and are subject to larger swings in capital flows.  This all implies that Latin America needs to work particularly hard and on different fronts to contain the risk of boom bust cycles.

Beyond a macroeconomic response, prudential measures that improve the functioning and the resilience of the financial sector should be part of the countries’ on-going structural reform efforts, which may need to be stepped up in response to the additional risks that sudden surges of capital might bring.
I will not get into the choice between discriminatory prudential measures and capital controls as this will be discussed extensively during the conference. Suffice it to say that, in general, prudential measures that target the risks that capital inflow surges might bring are to be preferred to capital controls that, by their nature, target the flows themselves. However, the appropriate choice of tools will, in practice, depend on the circumstances, including the nature of the risks posed by the capital inflows, whether the flows are being intermediated through the domestically regulated banking system, and other characteristics that might make one instrument less distortionary and more effective than the other.

A Shared Responsibility

I have spoken at some length on how emerging market economies might respond to capital inflows in part given how pressing the issue is for these countries at the current juncture—Brazil, for example, received $100 billion in portfolio and FDI flows in 2010, and a further $37 billion in the first quarter of this year.
But a multilateral institution like the IMF obviously needs to consider the other side of the coin—namely, policies in capital-exporting countries. To this end, Fund staff are undertaking in-depth analysis of the outward spillovers, through capital flows and otherwise, from the five largest economies in the world—China, the Euro Area, Japan, the United Kingdom, and the United States. The findings will be presented in a series of Spillover Reports, to be discussed by our Board, alongside each country’s Article IV report, this July. By shedding light on the impact of one country—or region’s—policies on others, we hope to facilitate the process of finding policies that serve both the national and the global interest.

I do not wish to anticipate these reports—or their discussion by our Executive Board—but to quote the eloquent Mr. White once more: “It is true that rich and powerful countries can for long periods safely and easily ignore the interests of poorer or weaker neighbors or competitors, but by doing so they will imperil the future and reduce the potentiality of their own level of prosperity. The lesson that must be learned is that prosperous neighbors are the best neighbors; that a higher standard of living in one country begets higher standards in others; and that a high level of trade and business is most easily attained when generously and widely shared.”

I believe that White’s words are as true today as they were seventy years ago. What has changed since that time is the definition of “rich and powerful countries.” Today, emerging market countries account for some 40 percent of global GDP, 30 percent of international trade, and almost 20 percent of world external savings. Ensuring that, globally, countries reap the full benefits of capital flows is thus a shared responsibility between advanced and emerging market economies, between surplus and deficit countries, between capital-exporters and capital-importers. Key to this will be addressing structural impediments, on both the supply and demand sides, that may artificially distort the relative price of capital, and result in its less-than-globally optimal allocation.

The issues are not easy, either analytically or politically. Certainly, we at the Fund do not have all of the answers, and our thinking will surely continue to evolve. Yet we know that this is a pressing matter for our entire membership. That is why I would like to thank the Brazilian authorities for convening this conference with us, and it is why we are looking to you, the participants, to help us analyze the issues over the next couple of days through productive discussions and debates.

  1. See, for example, the Independent Evaluation Office Report on the Evaluation of the IMF’s Approach to Capital Account Liberalization, 2005, available at:
  2. The International Monetary Fund, 1945-65. Vol. III, Documents by Keith Horsefield, 1969, (Washington DC: International Monetary Fund).
  3. * Emphasis added.
  4. “Capital Inflows: The Role of Controls” by Jonathan D. Ostry, Atish R. Ghosh, Karl Habermeier, Marcos Chamon, Mahvash S. Qureshi, and Dennis Reinhardt, Staff Position Note 10/04 (2010), available at:
  5. “Managing Capital Inflows: What Tools to Use?” by Jonathan D. Ostry, Atish R. Ghosh, Karl Habermeier, Luc Laeven, Marcos Chamon, Mahvash S. Qureshi, and Annamaria Kokenyne. Staff Discussion Note 11/06 (2011), available at:
  6. “Managing Abundance to Avoid a Bust in Latin America” by Nicolás Eyzaguirre, Martin Kaufman, Steven Phillips, and Rodrigo Valdés. Staff Discussion Note 11/07 (2011), available at
  7. Recent Experiences in Managing Capital Inflows—Cross-cutting Themes and Possible Policy Framework (2011), available at:

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ECB launches small climate-change unit to lead Lagarde’s green push



ECB launches small climate-change unit to lead Lagarde's green push 1

FRANKFURT (Reuters) – The European Central Bank is setting up a small team dedicated to climate change to spearhead its efforts to help the transition to a greener economy in the euro zone, ECB President Christine Lagarde said on Monday.

Lagarde has made the environment a priority since taking the helm at the ECB, taking a number of steps to include climate considerations in the central bank’s work as the euro zone’s banking watchdog and main financial institution.

She is now creating a team of around 10 ECB employees, reporting directly to her, to set the central bank’s agenda on climate-related topics.

“The climate change centre provides the structure we need to tackle the issue with the urgency and determination that it deserves,” Lagarde said in a speech.

She said that climate change belonged in the ECB’s remit as it could affect inflation and obstruct the flow of credit to the economy.

The ECB said earlier on Monday it would invest some of its own funds, which total 20.8 billion euros ($25.3 billion) and include capital paid in by euro zone countries, reserves and provisions, in a green bond fund run by the Bank for International Settlement.

More significantly, ECB policymakers are also debating what role climate considerations should play in the institution’s multi-trillion euro bond-buying programme.

So far the ECB has bought corporate bonds based on their outstanding amounts but Lagarde has said the bank might have to consider a more active approach to correct the market’s failure to price in climate risk.

“Our strategy review enables us to consider more deeply how we can continue to protect our mandate in the face of (climate) risks and, at the same time, strengthen the resilience of monetary policy and our balance sheet,” Lagarde said.

(Reporting by Balazs Koranyi; Editing by Francesco Canepa and Emelia Sithole-Matarise)

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What to expect in 2021: Top trends shaping the future of transportation



What to expect in 2021: Top trends shaping the future of transportation 2

By Lee Jones, Director of Sales – Grocery, QSR and Selected Accounts for Northern Europe at Ingenico, a Worldline brand

The pandemic has reinforced the need for businesses to undergo digital transformation, which is pivotal in the digital economy. In 2020, we saw the shift to online and cashless payments accelerated as a result of increased social distancing and nationwide restrictions.

The biggest challenge on all businesses into 2021 will be how they continue to adapt and react to the ever changing new normal we are all experiencing. In this context, what should we expect this year and beyond, in terms of developments across key sectors, including transport, parking and electric vehicle (EV) charging?

Mobility as a service (MaaS) and the future of transportation

Social distancing and lockdown measures have brought about a real change in public habits when it comes to transportation. In the last three months alone, we have seen commuter journeys across the globe reduce by at least 70%, while longer-distance travel has fallen by up to 90%. With it, cash withdrawals for payment has drastically reduced by 60%.

Technological advancements, alongside open payments, have unlocked new possibilities across multiple industries and will continue to have a strong impact. Furthermore, travellers are expecting more as part of their basic service. Tap and pay is one of the biggest evolutions in consumer payments. Bringing ease and simplicity to everyday tasks, consumers have welcomed this development to the transport journey. In-app payments are also on the rise, offering customers the ability to plan ahead and remain assured that they have everything they need, in one place, for every leg of their journey. Many local transport networks now have their own apps with integrated timetables, payments, and ticket download capabilities. These capabilities are being enabled by smaller more portable terminals for transport staff, and self-scanning ticketing devices are streamlining the process even further.

Lee Jones

Lee Jones

Ultimately, the end goal for many transport providers is MaaS – providing an easy and frictionless all-encompassing transport system that guides consumers through the whole journey, no matter what mode of travel they choose. Additionally, payment will remain the key orchestrator that will drive further developments in the transportation and MaaS ecosystems in 2021. What remains critical is balancing the need for a fast and convenient payment with safety and data privacy in order to deliver superior customer experiences.

The EV charging market and the accelerating pace of change  

The EV charging market is moving quickly and represents a large opportunity for payments in the future. EVs are gradually becoming more popular, with registrations for EVs overtaking those of their diesel counterparts for the first time in European history this year. What’s more, forecasts indicate that by 2030, there will be almost 42 million public charging points deployed worldwide, as compared with 520,000 registered in 2019.

Our experience and expertise in this industry have enabled us to better understand but also address the challenges and complexities of fuel and EV payments. The current alternating current (AC) based chargers are set to be replaced by their direct charging (DC) counterparts, but merchants must still be able to guarantee payment for the charging provider. Power always needs to be converted from AC to DC when charging an electric vehicle, the technical difference between AC charging and DC charging is whether the power gets converted outside or inside the vehicle.

By offering innovative payment solutions to this market segment, we enable service operators to incorporate payments smoothly into their omnichannel customer experience that also allows businesses to easily develop acceptance and provide a unique omnichannel strategy for EV charging payments. From proximity to online payments, it will support businesses by offering a unique hardware solution optimized for PSD2 and SCA. It will manage both near field communication (NFC) cards and payments from cards/smartphones, as well as a single interface to manage all payments, after sales support and receipt with both ePortal and eReceipts.

Cashless options for parking payments

The ‘new normal’ is now partly defined by a shift in consumer preference for cashless, contactless and mobile or embedded payments. These are now the preferred payment choices when it comes to completing the check-in and check-out process. They are a time-saver and a more seamless way to pay.

Drivers are more self-reliant and empowered than ever before, having adopted technologies that work to make their life increasingly efficient. COVID-19 has given rise to both ePayment and omnichannel solutions gaining in popularity. This has been due to ticketless access control based on license plate recognition or the tap-in/tap-out experience, as well as embedded payments or mobile solutions for street parking.

These smart solutions help consider parking services more broadly as a part of overall mobility or shopping experience. Therefore, operators must rapidly adapt and scale new operational practices; accept electronic payment, update new contactless limits, introduce additional payments means, refund the user or even to reflect changing customer expectations to keep pace.

2021: the journey ahead

This year,  we expect to see an even greater shift towards a cashless society across these key sectors, making the buying experience quicker and more convenient overall.

As a result, merchants and operators must make the consumer experience their top priority as trends shift towards simplicity and convenience, ensuring online and mobile payments processes are as secure as possible.

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Opportunities and challenges facing financial services firms in 2021



Opportunities and challenges facing financial services firms in 2021 3

By Paul McCreadie, Partner at ECI Partners, the leading growth-focused mid-market private equity firm

Despite 2020 being an enormously disruptive year for businesses, our latest Growth Index research reveals that almost three quarters (74%) of mid-market financial services companies remained resilient throughout the pandemic.

This is positive news, especially when taking into account the economic disruption that financial services firms have had to go through since the crisis began. No doubt 2021 will also hold its own challenges – as well as opportunities – for firms in this sector.

Challenges outlook

Unsurprisingly, the biggest short-term concern for financial firms for the year ahead involved changing pandemic guidance, with 42% citing this as a top concern. With the UK currently experiencing a third lockdown many financial services businesses will have already had to adapt to rapidly changing guidance, even since being surveyed.

Businesses will also be considering the need to invest in working from home operations, and there may be uncertainty over re-opening offices on a permanent basis.  According to the research 30% of financial services firms are planning to adopt remote working on a permanent basis, so decisions need to be made now about whether they invest more in enabling staff to do this, or in their current office premises.

Due to Brexit, UK financial services firms are no longer able to passport their services into Europe, which may cause problems, particularly in the next 12 months as the Brexit deal is ironed out and the agreement is put into practice. Despite this, Brexit was only cited by 24% of financial firms as a short-term concern. While it’s comforting to see that UK financial firms aren’t hugely concerned about Brexit at this juncture, it is going to be vital for the ongoing success of the industry that the UK is able to get straightforward access to Europe and operate there without issue, otherwise we may see these concern levels rise.

Looking ahead to longer-term concerns for financial services businesses, the top concern was global economic downturn, of which 40% of firms cited this as a worry when looking beyond 2021.

Investing and adopting tech

Traditionally, the financial services sector has been slow to adopt digital transformation. Issues with legacy systems, coupled with often large amounts of data and a reluctance to undertake potentially risky change processes, have meant many firms are behind the curve when it comes to technology adoption. It’s therefore promising to see that so much has changed over the last year, with 45% of financial services firms having invested in AI and machine learning technology – making it the top sector to have invested in this space over the last 12 months.

One business that exemplifies the benefits of investing in machine learning is Avantia, the technology-enabled insurance provider behind HomeProtect. The business has undergone a large tech transformation in the last few years, investing in an underlying machine learning platform and an in-house data science team, which provides them with capabilities to return a quote to over 98% of applicants in under one second. This tech investment has allowed them to become more scalable, provide a more stable platform, improve customer service and consequently, grow significantly.

This demonstrates how this kind of tech can help businesses to leverage tech in order to offer a better customer experience, and retain and grow market share through winning new customers. This resilience should combat some of the concerns that firms will face in the next year.

Additionally, half (51%) of financial services firms have invested in cybersecurity tech over the last year, which allows them to protect the platforms on which they operate and ensure ongoing provision of solutions to their customers.

International resilience

Clearly, there is a benefit of international revenues and profits on business resilience. In practice, this meant that businesses that weren’t internationally diversified in 2020 struggled more during the pandemic. In fact, the businesses considered to be the least resilient through the 2020 crisis were three times more likely to only operate domestically.

Perhaps an attribute towards financial services firms’ resilience in 2020, therefore, was the fact that 53% already had a presence in Europe throughout 2020 and 38% had a presence in North America. This internationalisation gave them an advantage that allowed them to weather the many storms of 2020.

Looking at how to capitalise on this throughout the rest of 2021, half (51%) of are planning overseas growth in Europe over the next 12 months, and 43% in North America. Further plans to expand internationally is not only a good sign for growth, but should further increase resilience within the sector.


While there are many concerns, the fact that financial services businesses are investing in technology like AI and machine learning, as well as still planning to grow internationally, means that they are providing themselves with the best chances of dealing with any upcoming challenges effectively.

In order to maintain their growth and resilience throughout the next 12 months, it’s imperative that they continue to put their customers first, invest in technology and remain on the front foot of digital change.

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