To Legalise or Not to Legalize? A Case Study on the “Rules of the Road” for Managing Cross-Border Capital Flows

This article aims at contributing to the debate on how to regulate the global financial system by focusing on a specific policy choice that policy-makers confront in formulating the rules to maintain financial stability, namely the level of legalisation. In doing so, the paper critically examines the implications of a 2011 policy proposal to legalise the use of capital controls within an international code of conducted under the aegis of the IMF. Specifically, the paper provides a number of observations that casts doubt on the ability of the proposed legal code to attain some of the benefits that its advocates have put forward. These observations pertain to the unstable nature of global financial markets, the political-economy of financial liberalisation, and the historical record with international economic surveillance.