The case against capital controls: financial flows, crises, and the flip side of the free-trade argument
Critics of globalization view the free flow of capital as economically destabilizing and advocate capital controls for four main reasons: controls are intended to guard against volatility, prevent financial contagion, enable infant financial industries to develop in domestic markets, and be an effective measure of last resort that gives governments room in which to breathe while they pursue needed reforms. However, the empirical record does not support the beliefs of proponents of capital controls. Developing countries would be better served by addressing the real causes of financial turmoil. Specifically, countries should fix their unsound banking systems by opening their financial sectors to foreign competition, eliminate government guarantees against bank failures, create independent central banks, and move away from pegged exchange rates and toward floating or fully fixed exchange-rate regimes.
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