Assorted on Capital Controls

Have capital controls helped or hindered Asian financial markets?

There are volumes of academic research on this topic, which one can find easily online, and much of the academic literature on capital controls concludes that capital controls are indeed generally bad for financial market development. To summarize, this research finds that despite the possibility for short-run volatility in financial markets after liberalization (i.e., elimination of capital controls), in the long-run such liberalization results in larger, more stable financial markets with greater liquidity.

However, looking across the horizon at Asia, where most countries have some form of capital controls, it’s difficult to draw the conclusion that capital controls have hindered the (recent) development of the financial markets. Such a broad conclusion would be supported by the school of thought that supports the use of capital controls. In Asia, Malaysia is held up as the example (pdf) to show that the controls the country put into place in 1998 in the aftermath of the Asian financial crisis helped to produce faster economic recovery and turn around of the stock market as compared to other countries in the region (i.e., Thailand and Korea) that did not impose controls. Of course, there are also counter-arguments to this conclusion with some (pdf) research pointing to strong fundamentals in Malaysia being the driving recovery factor.

So, after all of the years of experience and reams of paper used in the research of topic of capital controls, what can policy makers across Asia make of all of this in terms of financial sector development policy? Are there any specific lessons that can be applied across countries in Asia or is issue this simply too complex to be dealt with on a regional or multilateral basis?

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