A lot of the discussion on quantitative easing (QE) has been
about the yen, the dollar and the euro. But let’s
not forget emerging markets. Economies that are otherwise
performing well are suffering the effects. It is hitting Latin
America, maybe disproportionately so, because we have floating,
Parting Shot: Armed resistance
Battling the effects of quantitative easing is one of the biggest challenges facing emerging markets. But capital controls are no solution, says Chile’s finance minister Felipe Larraín
Resisting QE is one of our main challenges. One might argue
that appreciation is a good thing, but it puts pressure on the
export sector, particularly on agriculture and industry.
As an economy gets wealthier, its exchange rate should
appreciate. The rate at which that should occur is the rate
that would capture the differences of productivity improvements
in the economy. But that is more a long-term phenomenon.
Exchange rates are moving more according to short-term
increases in the monetary base. This is what happens when
interest rates are at the floor and countries resort to QE.
If one country does QE, other countries with similar issues
will follow. I understand the plight of Japan. It suffered an
earthquake and an economic downturn and has been stagnant for
two decades. But we must remember that QE was never a part of
the normal toolkit, at least relative to how much it has now
I’m not being naïve here. I
don’t pretend that the US, Japan and Europe will
conduct their monetary policy based on the plight of emerging
economies. Of course not. But it is one of the main challenges
emerging market policymakers are facing today. Our industries
are losing competitiveness because of currency
Still, all the blame should not be placed only on the
economies that are pursuing QE. Other countries lack market
based exchange rates. Take China. If you let the Chinese
currency float, I have very little doubt what would happen: it
would appreciate. However, we are the ones facing appreciation
pressures – on the Chilean peso, on the
Peruvian sol, on the Colombian peso, on the
Mexican peso, on the Brazilian real.
I am skeptical of the effects of additional rounds of QE for
the economies pursuing it. It will not solve the fundamental
problems: you may think that QE is a good pill to ease your
headache, but it won’t get rid of
what’s causing the headache.
We know from history what the end result of currency wars
is: countries raise tariffs. The incentives for protectionism
come from these kinds of policies. They also trigger other
measures like capital controls.
The first policy response is to have a responsible, moderate
increase in government spending, ideally below the rate of GDP
growth. The second is managing government debt. If you have a
lot of dollar and foreign currency revenues, if you
don’t want to just sell that foreign currency,
then you issue government debt locally.
The third approach is central bank intervention. This is
beyond the realm of the finance ministries. I talk to the
central bank regularly. It is very important that economic
authorities coordinate. But we respect their autonomy. They
have their policy tools and we have ours.
Another option is macro-prudential measures. We
haven’t precluded using them we just
haven’t used them so far. Then there are capital
controls. A last resort for countries is just plain
We have said repeatedly that taxing foreign capital is not
an avenue we would like to pursue. We have not considered it
Capital controls mainly change the composition of capital
but they don’t stem the absolute flows. They also
have some secondary effects and it is highly doubtful that they
will have an effect on the exchange rate. Also, people always
find ways to circumvent them.
The approach I am taking is a practical one. It is based on
research on the effects of capital controls. We have a lot of
experience with capital controls in Latin America. You can
never say never, but I’m very skeptical about
their effects. LF
Felipe Larraín is Chile’s finance
minister. He was interviewed by Taimur Ahmad.