A Defense of Capital Controls in Light of the Asian Financial Crisis
Crotty, James, Epstein, Gerald, Journal of Economic Issues
Capital controls are in fashion once again.(1) In mid-1997, financial panic raced across Asia, putting controls over short-term capital movements back on the political agenda, just as had happened during the crises in the Southern Cone of Latin America in the late 1970s and early 1980s, the EMS crisis of 1992, and the Mexican crisis of 1994. The fact that those Asian countries that control capital flows most tightly, such as China, Taiwan, and India, have been least affected by financial aspects of the current crisis has not gone unnoticed. Prestigious mainstream economists such as Joseph Stiglitz, Paul Krugman, and Dani Rodrik have called for the use of capital controls to help solve this crisis and avoid future disasters.(2) However, if and when this crisis ends, history suggests that the celebration of open global financial markets is likely to return, pushing support for capital controls back to what Keynes called the "underworld" of economics [see Grabel 1999].
We believe that the case for capital controls is much stronger than the current debate would indicate.(3) Permanent capital controls are needed by both developed and developing economies and for both economic and political reasons. In the South, capital controls are required not just to prevent speculative financial cycles and extreme exchange rate instability, but, more importantly, to facilitate the kinds of state-led industrial policies that East Asian countries used to create the only real development success stories of the past 40 years.(4) Permanent capital controls are also needed in the North to facilitate the construction of a new era of high employment, falling inequality, and a stronger social welfare system. While there are economic obstacles to the achievement of these objectives, the biggest impediment to the creation of a new "Golden Age" in the North and new East Asian models in the South is political - the most powerful political forces in advanced and developing countries bitterly oppose the policies needed to achieve these economic goals.
The evolution of the global neo-liberal regime over the past two decades has brought high unemployment, slow growth, rising inequality, and deteriorating social services to the majority of people ensnared in its web. But it has simultaneously enriched and politically empowered all mobile forms of capital, especially financial interests, or "rentiers." Rentiers, in turn, have been a central force behind the creation of regressive domestic and international institutions and policies that have further enhanced and protected their profits and prerogatives. One key source of the power of capital to dictate policy, embedded in the institutions of neo-liberalism, is the threat to withhold financial and real investment from any country, North or South, that does not accept its political priorities.
We are concerned here with a broad question: Can capital controls help overturn the destructive neo-liberal regime and facilitate the creation of new economic institutions and policies that will greatly improve the quality of life for the majority of the world's people? Sustained high unemployment is now taken for granted across Europe and in most of the world. Inequality is on the rise almost everywhere. Across Asia, tens of millions of people are being pushed back into abject poverty. Thus, the key question is whether capital controls can help to alter the current configuration of class economic and political power to facilitate the creation of new political commitments in support of full employment macro policy, public investment, credit allocation, income redistribution, and effective industrial policies.
Capital controls can be helpful in several ways. First and foremost, such controls directly restrict the ability of rentiers to undermine progressive economic policies by eliminating their "run away" option. Second, by making expansionary macroeconomic policies more feasible, controls can facilitate the attainment of full employment, thereby strengthening labor's economic and political bargaining power. …