Fletcher in the News

Do Capital Controls Work?: Professor Klein Comments in The Economist

The Economist

Just in Case: Capital Controls are Back as Part of Many Countries’ Financial Armoury

It was as if the Vatican had given its blessing to birth control. The International Monetary Fund, which has long been the ideological guardian of borders open to capital, declared last November that under certain circumstances capital controls were a good thing...

...“Capital controls” is a loosely defined term. In the post-war period such controls usually took the form of outright prohibition or quotas on the amount of money that could be moved in or out of a country. Some countries, notably China, still employ such controls, and others have reimposed them to deal with the aftermath of crisis, among them Iceland and Cyprus. But those post-crisis controls are explicitly temporary, and even China has taken some important steps towards relaxing controls in recent years, for example by making the renminbi more easily convertible. The sort of controls now in favour are lighter-touch, market-based ones such as taxes on certain types of flows, changes to withholding taxes and differential reserve and liquidity requirements for foreign funds. They amount to a selective embrace of globalisation, not a rejection...

...Do controls work? Countries that have them certainly seem to think so. A study by Brazil’s central bank claims its measures slowed down excessive growth in certain types of credit such as car loans; forced foreign-currency borrowers to lengthen their terms, leaving them less vulnerable to the fickleness of short-term lenders; and reduced banks’ derivatives exposure. A study by Valentina Bruno of American University in Washington and Hyun Song Shin, a Princeton professor who advised South Korea on its capital controls (mainly in the form of a tax on certain foreign-currency deposits), says they made the country “less sensitive to global factors”. Many investors agree. “They do exactly what they are intended to do: put sand in the market,” says Mohamed El-Erian, chief executive of PIMCO, the world’s largest bond-fund manager. “We think twice, or three times.”

Others are more sceptical. Mr Klein notes that after Brazil and South Korea imposed controls, their currencies continued to rise at about the same rate as that of Chile, which did not.

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