Those who have followed the IMF's policy prescription over the years, would have thought that the headline "IMF Suggests Capital Controls" was more likely to have come from The Onion than from Wall Street Journal, or – god forbid – the IMF! 

Click on the listen button to hear the the NPR piece that summarizes it all (here is the transcript). 

There must be a lively debate going on behind closed doors at IMF Headquarters. This after decades of pushing financial openness as a centerpiece of IMF reforms (see also here or here). For a long time the official policy was that "liberalization of restrictions on external and domestic financial transactions would (1) improve financial efficiency by increasing competition in domestic financial systems and (2) to reduce financial risks by allowing domestic residents to hold internationally diversified portfolios." 

Bhagwati's original Foreign Affairs piece is here. The IMF's rejoinder under the pen name for a PR guy (I guess no IMF economist was willing to have his/her name under the statement…) show how difficult it is to adopt new ideas and reject orthodoxy at leviathan institutions.   Here is a longer treatise on the history of capital flows – and their effects. I have a personal interest in this I coauthored a paper (with Steve Turnovsky) in May 1998 that explained and highlighted such capital flow reversals. You guessed it, it was skeptically received and not published until 1999, since it violated the orthodoxy.  

Update 11/11/2011 – from the New York Times: Countries See Hazards in Free Flow of Capital

LONDON — In China and Taiwan, regulators are imposing fresh restrictions on stock market investments by foreigners. In Brazil, officials have twice raised taxes on foreign investors. Even in South Korea, host to this week’s Group of 20 meeting, pressure is building on the government to take similar steps. As the leaders of the 20 major economic powers gather in Seoul, an increasing number of them have either imposed curbs or are in the process of doing so to slow the torrent of hot money into their markets…

But as the sums have compounded and led to more market volatility, fast-growing countries have begun to worry that short-term investment will push up the value of their currencies, make their goods less competitive in the global market, and lead to asset bubbles that will be painful to deflate… “The world has learned about the perils of free market finance — global financial liberalization just does not work as advertised,” said Dani Rodrik, a political economy professor at the John F. Kennedy School of Government at Harvard. “Just as John Maynard Keynes said in 1945 — capital controls are now orthodox.”

Many countries are discussing additional steps because they fear that the Federal Reserve’s latest bid to revive the United States economy by pumping an additional $600 billion into the banking system will further weaken the dollar and send more money into fast-growing markets. The latest restrictions are as various as taxes on bond and equity flows and extended rules on how quickly short-term capital may be repatriated.