Capital controls re-examined: the case for ‘smart’ controls
AbstractThe global financial crisis which began in east Asia in 1997 is not over, neither is the inquest into its implications for adjustment policy. In the wake of this crisis, we focus here on the role of capital controls, which formed a much publicised part of the crisis-coping strategy in one country (Malaysia) and, less openly, were also deployed by other crisis-afflicted countries. Evaluation so far has examined different target variables with different estimation methods, generally concentrating on efficiency and stability indicators and ignoring equity measures; it has also typically treated `control´ as a one-zero dummy variable, ignoring the `quality´ of intervention and in particular the extent to which efficiency gains are obtained in exchange for controls. Partly because of these limitations, the literature has reached no consensus on the impact of controls, nor therefore about where they fit within the set of post-crisis defence mechanisms. We propose an approach in which the government plays off short-term political security against long-term economic gain; the more insecure its political footing, the greater the weight it gives to political survival, which is likely to increase the probability of controls being imposed. The modelling of this approach generates a governmental `policy reaction function´ and an impact function for controls, which are estimated by simultaneous panel-data methods across a sample of thirty developing and transitional countries between 1980-2003, using, for the period since 1996, the `new´ IMF dataset which differentiates between controls by type. We find that controls appear to cause increases in income equality, and are significantly associated with political insecurity and relatively low levels of openness to trade. They do not, in our analysis, materially influence the level of whole-economy productivity or GDP across the sample of countries examined, although they do influence productivity in particular sectors, in particular manufacturing. But the dispersion around this central finding is wide: the tendency for controls to depress productivity by encouraging rent-seeking sometimes is, and sometimes is not, counteracted by purposive government policy actions to maintain competitiveness. Whether or not this happens – whether, as we put it, controls are `smart´, and the manner in which they are smartened - is vital, on both efficiency and equity grounds. We devise a formula for, and make the case for capital controls which are time-limited, and contain an inbuilt incentive to increased productivity, as a means of improving the sustainability and equity of the adjustment process whilst keeping to a minimum the cost in terms of productive efficiency.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by The University of Sheffield, Department of Economics in its series Working Papers with number 2005009.
Length: 35 pages
Date of creation: Jun 2005
Date of revision: Jun 2005
Capital Controls; Income Distribution; Political Economy.;
Other versions of this item:
- Jarita Duasa & Paul Mosley, 2006. "Capital Controls Re-examined: The Case for 'Smart' Controls," The World Economy, Wiley Blackwell, vol. 29(9), pages 1203-1226, 09.
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
- O19 - Economic Development, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
- P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism
- D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Scharfstein, David S & Stein, Jeremy C, 1990.
"Herd Behavior and Investment,"
American Economic Review,
American Economic Association, vol. 80(3), pages 465-79, June.
- Reinhart, Carmen & Edison, Hali, 2001.
"Stopping hot money,"
13862, University Library of Munich, Germany.
- Alesina, Alberto & Perotti, Roberto, 1996.
"Income distribution, political instability, and investment,"
European Economic Review,
Elsevier, vol. 40(6), pages 1203-1228, June.
- Alberto Alesina & Roberto Perotti, 1993. "Income Distribution, Political Instability, and Investment," NBER Working Papers 4486, National Bureau of Economic Research, Inc.
- Anita Doraisami, 2004. "From crisis to recovery: the motivations for and effects of Malaysian capital controls," Journal of International Development, John Wiley & Sons, Ltd., vol. 16(2), pages 241-254.
- Andrew G Haldane & Gregor Irwin & Victoria Saporta, 2004.
"Bail out or work out? Theoretical considerations,"
Bank of England working papers
219, Bank of England.
- Vittorio Grilli & Gian-Maria Milesi-Ferretti, 1995.
"Economic Effects and Structural Determinants of Capital Controls,"
IMF Working Papers
95/31, International Monetary Fund.
- Vittorio Grilli & Gian Maria Milesi-Ferretti, 1995. "Economic Effects and Structural Determinants of Capital Controls," IMF Staff Papers, Palgrave Macmillan, vol. 42(3), pages 517-551, September.
- Rawi Abdelal & Laura Alfaro, 2003. "Capital and Control: Lessons from Malaysia," Challenge, M.E. Sharpe, Inc., vol. 46(4), pages 36-53, July.
- Obstfeld, Maurice, 1992.
"Risk-Taking, Global Diversification, and Growth,"
CEPR Discussion Papers
688, C.E.P.R. Discussion Papers.
- Maurice Obstfeld, 1992. "Risk-taking, global diversification, and growth," Discussion Paper / Institute for Empirical Macroeconomics 61, Federal Reserve Bank of Minneapolis.
- Maurice Obstfeld., 1993. "Risk-Taking, Global Diversification, and Growth," Center for International and Development Economics Research (CIDER) Working Papers C93-016, University of California at Berkeley.
- Maurice Obstfeld, 1992. "Risk-Taking, Global Diversification, and Growth," NBER Working Papers 4093, National Bureau of Economic Research, Inc.
- Jeffrey D. Sachs & Andrew Warner, 1995.
"Economic Reform and the Process of Global Integration,"
Brookings Papers on Economic Activity,
Economic Studies Program, The Brookings Institution, vol. 26(1, 25th A), pages 1-118.
- Jeffrey Sachs & Andrew Warner, 1995. "Economic Reform and the Progress of Global Integration," Harvard Institute of Economic Research Working Papers 1733, Harvard - Institute of Economic Research.
- Alesina, Alberto & Tabellini, Guido, 1989.
"External debt, capital flight and political risk,"
Journal of International Economics,
Elsevier, vol. 27(3-4), pages 199-220, November.
- Alesina, Alberto F & Tabellini, Guido, 1988. "External Debt, Capital Flight and Political Risk," CEPR Discussion Papers 253, C.E.P.R. Discussion Papers.
- Alberto Alesina & Guido Tabellini, 1988. "External Debt, Capital Flight and Political Risk," NBER Working Papers 2610, National Bureau of Economic Research, Inc.
- Alberto Alesina & Guido Tabellini, 1988. "External Debt, Capital Flight and Political Risk," UCLA Economics Working Papers 538, UCLA Department of Economics.
- Tabellini, Guido & Alesina, Alberto, 1989. "External Debt, Capital Flight and Political Risk," Scholarly Articles 4553019, Harvard University Department of Economics.
- Richard N. Cooper, 1999. "Should Capital Controls be Banished?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(1), pages 89-142.
- Sebastian Edwards, 1999.
"How Effective are Capital Controls?,"
NBER Working Papers
7413, National Bureau of Economic Research, Inc.
- Perotti, Roberto & Alesina, Alberto, 1996. "Income Distribution, Political Instability, and Investment," Scholarly Articles 4553018, Harvard University Department of Economics.
- Paul Mosley & John Hudson & Arjan Verschoor, 2004. "Aid, Poverty Reduction and the 'New Conditionality'," Economic Journal, Royal Economic Society, vol. 114(496), pages F217-F243, 06.
- Tornell, Aaron, 1990. "Real vs. financial investment can Tobin taxes eliminate the irreversibility distortion?," Journal of Development Economics, Elsevier, vol. 32(2), pages 419-444, April.
- Makram El-Shagi, 2012. "Initial Evidence from a New Database on Capital Market Restrictions," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 59(3), pages 283-292, June.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Georgios Efthyvoulou).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.