Capital Controls in Emerging Economies

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

tells the foreign investor that funds are repatriatable just so long as the government thinks it politically profitable.

A government might instead adopt a policy of free capital movements for all. This increases the credibility of government promises of free capital movement for foreign funds. It exposes the government to larger capital outflows if people decide that government policy is on the wrong track; if the government adopts policies that appear economically detrimental, market reactions have even stronger exchange rate effects. Full convertibility signals that the government is confidant that it can and will pursue policies the market approves. Less-than-full convertibility announces that the government fears market reactions to its current and future policies; it raises wealth- holders' fears that future policies will deteriorate, and that this deterioration may include restrictions on foreigners' capital outflows.

A second reason that government promises of free repatriation are not fully credible is that much Western discussion suggests that capital controls are a useful or even necessary part of liberalizing countries' government policies. For example, some observers argue that after the Second World War, Western European countries took many years before allowing free capital mobility; the data argue that yields on short-term government securities on a covered basis reached equality only around 1985. In the European Community, Italy removed capital controls only in 1991, and Greece and Portugal had until 1995 to do the same;28 if rich Western European countries took so long to remove capital controls, surely poorer liberalizing countries will have to take even longer. This argument implicitly assumes that Western European capital market restrictions were optimal. It might be argued that Western European restrictions were suboptimal and hindered recovery; if liberalizing countries follow the postwar policies of Western Europe, they too will take a very long time to recover. In another example, some observers argue that a payments union, perhaps along the lines of the postwar European Payments Union, might be useful for Eastern Europe. A similar payments union would institutionalize capital controls, signaling foreign investors that liberalizing-country governments view capital controls as a legitimate and useful policy tool.29


Conclusions

Many countries liberalize when their poor economic performance shows that restrictions on free markets can carry very heavy prices. Some of the liberalizing nations, and many of the economists offering advice, have learned this lesson better about goods markets than capital markets. Policy prescriptions often call for progressive goods market liberalization, starting right away. Discussions give serious consideration to the costs of delay in

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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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