Capital Controls in Emerging Economies

By Christine Ries Hekman; Richard J. Sweeney | Go to book overview

advantages and disadvantages of each approach warrant gauging. Gradual opening softens the inroads of external competition and provides leeway for domestic preparation to confront that competition. But precisely by giving time to adjust, there is no guarantee that the time will be used to prepare for external competition as opposed to continuing to exploit the opportunities of a closed or partially closed economy. If gradual opening encourages delays in adjustment, its costs will not fall below those from a rapid liberalization and it will not benefit from the latter's advantages. These advantages are the transparent signals that rapid opening of the economy conveys to economic agents and the consequent total absence of leeway for delays in behavioral adjustments to external competition.

It is generally agreed that efficiency criteria argue for completely free exchange systems, with appropriate safeguards, of course. But there are also pragmatic considerations for the establishment of full currency convertibility. These considerations include the desirability of strengthening the role of market forces as opposed to administrative controls; the need to encourage international resource flows; and the need to supplement domestic financial market liberalization and deregulation. In conclusion, economic logic advocates the dismantling of capital controls; developments in the world economy make them undesirable and ineffective; and a strong case can be made in support of rapid and decisive liberalization of capital transactions. All these considerations point strongly to a code of conduct that eschews resort to capital controls as an acceptable course of action for economic policy.


Notes

The views expressed in this paper are mine and should not be attributed to the International Monetary Fund. A different version of this paper was presented at an International Conference on "Money and Finance in the Open Economy" sponsored by the Institute of Economic Research of Korea University and the Bank of Korea, held in Seoul on November 6-7, 1992; see Guitián ( 1995). The general issue of international capital flows and the particular subject of capital account liberalization have been extensively studied in the International Monetary Fund. In the preparation of this paper I have relied heavily on the Fund's most recent studies, including International Monetary Fund ( 1991), Mathieson and Rojas-Suárez( 1993), and Calvo, Leiderman and Reinhart ( 1993).

1.
In particular, the Articles of Agreement of the International Monetary Fund, which contain such code of conduct, prescribe that "Members may exercise such controls as are necessary to regulate international capital movements, but no member may exercise these controls in a manner which restricts payments for current transactions or which will unduly delay transfers of funds in settlements of commitments, except as provided in Article VIII, Section 3(b) and in Article XIV, Section 2" (Article VI, Section 3).
2.
See Article VIII of the Articles of Agreement in the International Monetary

-29-

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Capital Controls in Emerging Economies
Table of contents

Table of contents

  • Title Page iii
  • Contents vii
  • Preface ix
  • Acknowledgments xi
  • Introduction and Overview 1
  • Notes 12
  • 1 - Orthodoxy is Right: Liberalize The Capital Account Last 13
  • Notes 16
  • 2 - Reality and the Logic Of Capital Flow Liberalization 17
  • Introduction 17
  • Notes 29
  • 3 - Preconditions for Liberalization Of Capital Flows: a Review And Interpretation 33
  • Introduction 33
  • Notes 43
  • 4 - The Information Costs Of Capital Controls 45
  • Introduction 45
  • Conclusions 54
  • References 55
  • 5 - Currency Convertibility, Policy Credibility and Capital Flight In Poland and the Czech and Slovak Federal Republic 63
  • Introduction 63
  • Notes 83
  • References 85
  • 6 - Capital Controls and Corporate Investment Behavior 89
  • Introduction 89
  • Notes 108
  • References 108
  • 7 - Capital Account Liberalization and Policy Incentives: an Endogenous Policy View 111
  • Introduction 111
  • Notes 131
  • 8 - A Payments Mechanism For The Independent States Of The Former Soviet Union 137
  • Introduction: Economic Rationale For a Payments Mechanism 137
  • References 157
  • About the Editors and Contributors 159
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