Capital Control - History - Transition Period and Washington Consensus: 1971 - 2009

2009

By the late 1970s, as part of the displacement of Keynesianism in favour of free market orientated policies and theories, countries began abolishing their capital controls, starting between 1973 - 1974 with the U.S., Canada, Germany and Switzerland and followed by Great Britain in 1979. Most other advanced and emerging economies followed, chiefly in the 1980s and early 1990s. During the period spanning from approximately 1980 - 2009, known as the Washington Consensus, the normative opinion was that capital controls were to be avoided except perhaps in a crisis. It was widely held that the absence of controls allowed capital to freely flow to where it is needed most, helping not only investors to enjoy good returns, but also helping ordinary people to benefit from economic growth. During the 1980s many emerging economies decided or were coerced into following the advanced economies by abandoning their capital controls, though over 50 retained them at least partially. The orthodox view that capital controls are a bad thing was challenged following the 1997 Asian Financial Crisis. Asian nations that had retained their capital controls such as India and China could credit them for allowing them to escape the crisis relatively unscathed. Malaysia's prime minister Mahathir bin Mohamad imposed capital controls as an emergency measure in September 1998, both strict exchange controls and limits on outflows from portfolio investments - these were found to be effective in containing the damage from the crisis. In the early nineties even some pro-globalization economists like Jagdish Bhagwati and some writers in publications like The Economist, spoke out in favor of a limited role for capital controls. But while many developing world economies lost faith in the free market consensus, it remained strong among western nations.