Capital Control - Free Movement of Capital and Payments - Arguments in Favour of Capital Controls

Arguments in Favour of Capital Controls

Pro capital control economists have made the following points.

• Capital controls may represent an optimal Macroprudential policy that reduces the risk of financial crises and prevents the associated externalities.
• Global economic growth was on average considerably higher in the Bretton Woods periods where capital controls were widely in use. Using Regression analysis, economists such as Dani Rodrik have found no positive correlation between growth and free capital movement.
• Capital controls limiting a nation's residents from owning foreign assets can ensure that domestic credit is available more cheaply than would otherwise be the case. This sort of capital control is still in effect in both India and China. In India the controls encourage residents to provide cheap funds directly to the government, while in China it means that Chinese businesses have an inexpensive source of loans.
• Economic crises have been considerably more frequent since the Bretton Woods capital controls were relaxed. Even economic historians who class capital controls as repressive have concluded capital controls, more than the period's high growth, were responsible for the infrequency of crisis. Studies have found that large uncontrolled capital inflows have frequently damaged a nation's economic development by causing its currency to appreciate, by contributing to inflation, and by causing unsustainable economic booms which often precede financial crises - caused when the inflows sharply reverse and both domestic and foreign capital flee the country. The risk of crisis is especially high in developing economies where the inbound flows become loans denominated in foreign currency, so that the repayments become considerably more expensive as the developing country's currency depreciates. This is known as original Sin (economics).