What's In a Name? That Which We Call Capital Controls

Abstract

This paper investigates why controls on capital inflows have a bad name, and evoke such visceral opposition, by tracing how capital controls have been used and perceived, since the late nineteenth century. While advanced countries often employed capital controls to tame speculative inflows during the last century, we conjecture that several factors undermined their subsequent use as prudential tools. First, it appears that inflow controls became inextricably linked with outflow controls. The latter have typically been more pervasive, more stringent, and more linked to autocratic regimes, failed macroeconomic policies, and financial crisis-inflow controls are thus damned by this "guilt by association." Second, capital account restrictions often tend to be associated with current account restrictions. As countries aspired to achieve greater trade integration, capital controls came to be viewed as incompatible with free trade. Third, as policy activism of the 1970s gave way to the free market ideology of the 1980s and 1990s, the use of capital controls, even on inflows and for prudential purposes, fell into disrepute.

Inequality, autocracy, and sovereign funds as determinants of foreign portfolio equity flows

“…For outflows, Brada et al (2011, p. 741) conclude that “government repression and regulation … [are] more effective in combating capital flight” in the Commonwealth of Independent States (CIS) countries. This conclusion is in line with Ghosh (2016), who suggests that autocratic regimes use capital controls to deter money from leaving. Asiedu and Lien (2004) study the relation between capital controls and FDI and find that capital controls affect FDI to East Asia and Latin America but have limited effect in sub‐Saharan Africa and the Middle East.…”

Managing the Tide: How Do Emerging Markets Respond to Capital Flows?

“…While their indices may capture broad trends in liberalization, they are likely to overlook the finer, higher frequency variations in capital account restrictions (e.g., if the tax rate on inflows is increased from 10 percent to 20 percent, the change will not be reflected in the indices they use; by contrast, the increase would be captured in our change-based measures). Second, we consider residency-based capital controls together with currency-based prudential measures; both are likely to deter capital flows, and EMEs have been increasingly relying on the latter to mitigate financial-stability risks associated with capital inflows (Ostry et al, 2012;Ghosh and Qureshi, 2016b). Third, existing studies analyze the behavior of capital controls against several macroeconomic indicators (such as real GDP growth, exchange rate, domestic credit growth, etc.…”

Varieties of state interventionism in financial policy in the aftermath of the 2008 global crisis

“…Capital controls became acceptable policy instruments in the context of the crisis as they were being widely used by countries with sound macroeconomic fundamentals and high levels of reserves. The acknowledgment of this type of practice as a possible alternative by the IMF Ocampo, 2013;Tian, 2017;Ghosh;Qureshi, 2016;Ostry et al, 2011) became more apparent within the international debate on financial integration. Overall, the diffusion of this new official vision did not lead to the unanimous adoption by emerging countries.…”