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Capital Controls Re-examined: The Case for 'Smart' Controls

  • Jarita Duasa
  • Paul Mosley

The 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; however, it is moving over towards acknowledging that the quality and type of controls is important, as well as their intensity. 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. Copyright 2006 The Authors Journal compilation 2006 Blackwell Publishing Ltd .

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Article provided by Wiley Blackwell in its journal World Economy.

Volume (Year): 29 (2006)
Issue (Month): 9 (09)
Pages: 1203-1226

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Handle: RePEc:bla:worlde:v:29:y:2006:i:9:p:1203-1226
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