But what has experience taught us? After the strong booms in private capital flows around the world, spectacular reversals marked both the Mexican peso crisis in 1994 and the Asian crisis in 1997. Malaysia made headlines when it shrugged off the IMF’s advice and clamped controls on its capital movements.

The difference, according to the OECD, is that controls must be removed prudently and with the proper institutional back-up. An appropriate and workable sequencing of liberalising capital movements needs to be developed, with priority given, for instance, to direct investment and equity related portfolio investment. Furthermore, the free flow of capital can only work with a corresponding flow of information and transparency.

The selling point is that the Code is not an all-or-nothing contract. Before signing, each country has the right to remove certain transactions from the agreement. For instance, limiting a bank’s net foreign exchange exposure or maintaining certain crucial ratios in their balance sheets may be viewed, not as restrictions, but as prudent measures for investor protection. Signatories can only reduce or delete exemptions, they cannot add or extend them. The regulatory framework is designed to evolve in the direction of further liberalisation.

In any case, with virtually all the restrictions on the free flow of capital now abolished in OECD countries, recourse to exchange controls is not in prospect. And 40 years on, the OECD Code continues to evolve as the only multilateral tool there is to promote liberalisation of capital movements (see also article in Economy by Kenneth Rogoff).

©OECD Observer No 235, December 2002