Atish Rex Ghosh and Mahvash Saeed Qureshi
“I have only eight seconds left to talk about capital controls. But that’s OK. I don’t need more time than that to tell you: they don’t work, I wouldn’t use them, I wouldn’t recommend them … “
—Governor Agustín Carstens, Bank of Mexico
(Remarks made at Rethinking Macro Policy III Conference, Washington D.C., April 15, 2015)
Capital controls have a bad name. While their usefulness as a policy tool to manage the risks associated with capital inflows is increasingly acknowledged (IMF, 2012), as the quote above amply demonstrates, they are still viewed with considerable suspicion and misgiving.
An oft-heard argument against capital controls is that they can be evaded and circumvented. Yet no one makes that case when it comes to other policies—for example, that taxes should be abolished because they are subject to evasion. Likewise, even though macroprudential measures have been much in vogue since the global financial crisis, evidence of their effectiveness is no more compelling than it is for capital controls. Moreover, even when countries do impose controls on capital inflows, it is telling that they usually refer to them with euphemisms such as “prudential measures.”
Resentment toward outflow controls is understandable: residents may want to invest or safeguard their money abroad, and nonresidents want to be able to repatriate their funds on liquidation of their investments. More puzzling is the almost visceral opposition to emerging market economies’ use of controls to manage capital inflows—especially since such measures were integral to advanced economies’ management of speculative (“hot money”) flows when they pursued their own financial liberalization in the latter half of the 20th century.
So whence this bad name for inflow controls?
Abdelal, Rawi, 2006, “Writing the Rules of Global Finance: France, Europe, and Capital Liberalization,” Review of International Political Economy, Vol. 13, No. 1, pp. 1–27.
Edwards, Sebastian, 1999, “How Effective Are Capital Controls?” Journal of Economic Perspectives, Vol. 13, No. 4, pp. 65–84.
Helleiner, Eric, 1994, States and the Re-emergence of International Finance: From Bretton Woods to the 1990s (Ithaca, New York: Cornell University Press).
International Monetary Fund (IMF), 2012, “The Liberalization and Management of Capital Flows: An Institutional View” IMF Policy Paper (Washington).