Governments Should Drop Capital Controls, Says IEA Author
The case for controlling capital movements comes sometimes from economists who want an economy under pressure to have a temporary ‘breathing space’ from ‘destabilising’ capital flows. Sometimes they come from the anti-globalisation and anti-capitalism movements which would like permanent controls.
Both are misguided, according to Professor Capie. Capital flows are a powerful force for economic development which ensure that world savings are channelled to their best uses: capital controls strike at the root of those flows. Moreover, such controls are protectionist policies which, like all similar measures, are extremely difficult to remove because they attract a constituency which benefits from them and therefore resists abolition.
Capital controls always cause economic losses, argues Capie, and they seriously damage the credibility of a government’s commitment to a market economy. After examining the history of capital flows and capital flows since the late nineteenth century, Professor Capie concludes,
‘It is a myth that capital flows are destructive and destabilising: there is no such thing as a bad capital movement, only bad exchange rate systems.’ (p102)
Read the full paper here.