Are Capital Controls a Human Rights Violation?

     So suggests Jon Danielsson and Yves Smith is not too impressed by this. She doesn't like his article as a whole but she can't put her finger on what exactly is wrong. She offers it up for Naked Capitalism readers to analyze:

     "Yves here. I’m interested in getting informed reader responses to this post. While the conclusion may not be wrong, what bothers me is the lack of analysis supporting its conclusions. This just looks like applying neoliberal ideology to Iceland’s situation. Capital controls bad! See, we had a bad outcome! Must be due to those bad capital controls!"

      "Ahem. Iceland’s central bank failed and the country fell into a deep contraction. This isn’t a great climate for attracting investment. Even if you are confident that are buying something cheap, if it takes a long time for the economy to improve and your asset to appreciate, you would have been better off doing something else. And in this time period, there were lots of economies with better-looking prospects than Iceland. Put it another way, the author observes a correlation between the imposition of capital controls and a low level of foreign direct investment and treats it as causal. He never considers that both may be the effect of a monster financial crisis."

       Read more at http://www.nakedcapitalism.com/2013/03/the-capital-controls-in-cyprus-and-the-icelandic-experience.html#dgohi8v0kpjo5QiQ.99    

     The actual title of this post, however, was inspired by something the NC commentator lolcar said:

      "Whatever the economic pros and cons, construing capital controls as a human rights violation is just some world-class chutzpah."

       I don't know that it's so abusrd. If tomorrow the bank told you they weren't going to give you your money back or were going to hold on to it and dole it out in very small amounts you might feel that this was a pretty big outrage-maybe even the word "humans right violation" wouldn't sound so outrageous to you. I don't know whether I would call it that-it might depend on the circumstances-but it doesn't seem absurd to do so. 

        However, let's get to what Danielsson actually says. He starts out:

         "Cyprus has imposed temporary capital controls. This column sheds light on how temporary and how damaging they are likely to be, based on Iceland’s experience. The longer controls exist, the harder they are to abolish. Icelandic capital controls, which have been ‘temporary’ for half a decade, deeply damage the economy by discouraging investment. We can only hope the authorities that created the chaos in the first place realise that temporary really needs to mean temporary."

          It seems to me that capital controls are something that were necessary for Iceland under the circumstances-they actually had the IMF's blessing. In the normal way you wouldn't want this for 5 years but this is not normal times in Iceland-or Cyprus. 

          Here I think Ives is right. Danielsson seems to not consider that correlation doesn't prove causation:

          "The Icelandic capital controls have proven to be highly damaging for its economy; investment has collapsed and is just about the lowest in Europe at 14.4% of GDP in 2013, compared to the EU average of 18%. The reason is that foreign direct investment almost completely dried up and any domestic residents with money left over prefer to keep their funds liquid, ready to be exported when an opportunity presents itself. Domestic investment is not compatible with that objective."

          The fact that investment has collapsed in Iceland-some in the comments don't like FDI in principle-is not due to the controls. It would have collapsed in any case. As she points out it's hardly been a choice spot for foreign investors the last 5 years. 

          Here I have to admit, he's quite obtuse:

          "The capital controls violate EU laws regarding the principle of the four freedoms – free movement of goods, capital, services, and persons. The Cypriot capital controls will violate at least two of these principles, just as the Icelandic ones do. The free movement of capital is prevented by the controls."

          "Even more seriously, it violates the free movement of persons, and hence the human rights of people subject to capital controls. If one cannot sell one’s house and use the money to buy a house abroad, movement across borders is restricted. If one cannot take money out of the country, the ability to travel and live wherever one wants in the EU is restricted. Trying to restrict outflows to those for only ‘legitimate’ reasons will not work. One can always find someone with a legit reason to export money."

          "The fact that the European authorities stand so ready to abandon their fundamental principles in order to address a temporary, and relatively small, economic problem is a cause for concern."

          I think the key is that in general capital controls on how much of your own money you can move is not a good thing. However, this is not a general case. He also keeps making it sound as if the controls caused the problem which is mixing up causality:

           "It would have been much better for the IMF, the EU and the Cypriot government to accept the short-term outflow of money after the banks opened; this would have meant a much quicker return to normality. Instead, it will become harder and harder to lift the controls as economic uncertainty is likely to continue increasing."

          "We can only hope for the sake of the Cypriots that the capital controls are truly temporary, that the authorities that created the chaos in the first place realise that temporary really needs to mean temporary."

           He's shifting the blame to the authorities already when the controls have just been implemented. In my piece about controls the other day.  It's also rich for him to be worrying about breaking EU rules as if their track record in any way validates them. Woj argued that usually they're not a good thing but for small economies they can be. It's also rich to be worrying about breaking EU rules: as if their track record in anyway justifies them. 

          "I don't think free flow of financial capital is too much of an issue for the US and other large countries. However if you look at smaller developed and developing countries (where external financial capital flows can be multiples of GDP), than some form of managed trade may be desirable."

          "Cyprus' issue isn't that Russians were buying to many goods and services from them or that Cyprus was purchasing too many goods and services from Greece. The trouble was huge financial inflows to Cyprus being invested with leverage in Greece sovereign debt, housing, etc. Similar issues were behind the Asian currency crises and numerous others in recent decades."

          http://diaryofarepublicanhater.blogspot.com/2013/03/is-unrestricted-free-trade-and-idea.html

          There seems to me to be something to that. The U.S. since WWII has been know as the greatest proponent of free trade, however prior to WWII it had actually been quite protectionist. Krugman suggests that the rigidity on this is likely to relax a little more in th future-it already has with the EU and IMF accepting the controls:

          "Whatever the final outcome in the Cyprus crisis — we know it’s going to be ugly; we just don’t know exactly what form the ugliness will take — one thing seems certain: for the time being, and probably for years to come, the island nation will have to maintain fairly draconian controls on the movement of capital in and out of the country. In fact, controls may well be in place by the time you read this. And that’s not all: Depending on exactly how this plays out, Cypriot capital controls may well have the blessing of the International Monetary Fund, which has already supported such controls in Iceland."

       "That’s quite a remarkable development. It will mark the end of an era for Cyprus, which has in effect spent the past decade advertising itself as a place where wealthy individuals who want to avoid taxes and scrutiny can safely park their money, no questions asked. But it may also mark at least the beginning of the end for something much bigger: the era when unrestricted movement of capital was taken as a desirable norm around the world."

      "It wasn’t always thus. In the first couple of decades after World War II, limits on cross-border money flows were widely considered good policy; they were more or less universal in poorer nations, and present in a majority of richer countries too. Britain, for example, limited overseas investments by its residents until 1979; other advanced countries maintained restrictions into the 1980s. Even the United States briefly limited capital outflows during the 1960s."

      "Over time, however, these restrictions fell out of fashion. To some extent this reflected the fact that capital controls have potential costs: they impose extra burdens of paperwork, they make business operations more difficult, and conventional economic analysis says that they should have a negative impact on growth (although this effect is hard to find in the numbers). But it also reflected the rise of free-market ideology, the assumption that if financial markets want to move money across borders, there must be a good reason, and bureaucrats shouldn’t stand in their way."

       "As a result, countries that did step in to limit capital flows — like Malaysia, which imposed what amounted to a curfew on capital flight in 1998 — were treated almost as pariahs. Surely they would be punished for defying the gods of the market!"

      "But the truth, hard as it may be for ideologues to accept, is that unrestricted movement of capital is looking more and more like a failed experiment."

       http://www.nytimes.com/2013/03/25/opinion/krugman-hot-money-blues.html?partner=rssnyt&emc=rss&_r=2&