Regaining Control? Capital Controls and the Global Financial Crisis

The global financial crisis has triggered a transformation in thinking and practice regarding the role of government in managing international capital flows. This paper traces and evaluates the re-emergence of capital controls as legitimate tools to promote financial stability. Whereas capital controls were seen as “orthodox” by the framers of the Bretton Woods system, they were shunned during the neo-liberal era that began in the late 1970s. There is now an emerging consensus that capital controls can play a legitimate role in promoting financial stability. From 2009 to early 2011 a number of developing nations resorted to capital controls to halt the appreciation of their currencies, and to pursue independent monetary policies to cool asset bubbles and inflation.A preliminary analysis of the effectiveness of these controls is conducted for the cases of Brazil, South Korea, and Taiwan. This analysis suggests that Brazil and Taiwan have been relatively successful in deploying controls, though South Korea’s success has been more modest. The fact that capital controls continue to yield positive results is truly remarkable given the fact that there has been little (or contrary) support for global coordination, and that many nations lack the necessary institutions for effective policies. The paper concludes by pointing to the need for more concerted global and national efforts to manage global capital flows for stability and growth.