International Financial Governance under Stress: Global Structures versus National Imperatives

By Geoffrey R.D Underhill; Xiaoke Zhang | Go to book overview

3

Capital controls:
the neglected option

BENJAMIN J. COHEN

Why don’t emerging-market economies make more use of capital controls? Not long ago, in the wake of Asia’s great financial crisis, limitations on capital mobility appeared about to make a comeback. At the intellectual level, scholars began to accord new respectability to the old case for controls as an instrument of monetary governance. At a more practical level, one country – Malaysia – imposed comprehensive restraints and, with seeming success, survived to tell the tale. As I wrote soon after the crisis broke: ‘The tide… is starting to turn. Once scorned as a relic of the past, limits on capital mobility could soon become the wave of the future.’1 Yet in reality governments in the newly industrialising economies still hesitate to raise or restore impediments to the free flow of capital. Controls remain the neglected option. The question is: why?

Elsewhere, I have suggested that the explanation has much to do with the prominent role of the United States, the still dominant power in international finance.2 Washington, both directly and through the IMF, has brought its considerable power to bear to resist any significant revival of controls. Reflection suggests, however, that international politics is at best only part of the story; domestic politics too must be involved, in a mutually reinforcing interaction with the pressure of outside forces. The purpose of this chapter is to highlight the critical domestic side of the story. My focus is on the thirty or so newly industrialising countries, mostly located in east Asia and Latin America, that are commonly referred to as the ‘emerging markets’.3

I begin in section one with a quick look back at the transformation of the global financial environment that gradually occurred in recent decades – an epochal change that has made it increasingly difficult for governments everywhere to manage monetary affairs within their own sovereign territories. Capital controls represent one possible response to the growing challenge that global financial markets pose for national monetary governance. The pros and cons of capital controls are evaluated in section two, highlighting the tidal shift that has occurred at the level of scholarly discourse. The analytical case for controls, it is now widely acknowledged, is actually a good deal stronger than conventionally

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