As far as intellectual shifts go, the U-turn by the International Monetary Fund on capital controls is remarkable. In the 1990s, the IMF came close to including the promotion of capital account liberalisation in its rule book. On Monday, after a thorough three-year review, the fund has accepted institutionally that direct controls can play a useful role in calming volatile, international capital flows.

The past two decades of financial history show that the IMF is right to rethink its policy. Hasty liberalisations of the capital account were one of the reasons behind the Asian crisis of the late 1990s. Meanwhile, an array of controls has helped China to avoid a financial meltdown, contributing to its impressive growth record. Recent research by the IMF has shown that those nations that used capital controls were among the least hard-hit during the 2007 crisis.

Indeed, the benefits of liberalisation of the capital account are largest for economies with a high degree of financial and institutional development. In the absence of deep markets, inflows of hot money can lead to the creation of asset bubbles. The lack of regulators may induce foreign institutions to take excessive risks. When outside investors withdraw their investments, the sudden reversal can result in a crisis.