Friday, October 29, 2010


From an article in the FT. My comments are italicized.

Capital controls are not a new policy measure, of course. Instead, they were used universally by members of the Organisation for Economic Co-operation and Development (with the exception of the US) and across the developing world after the second world war, and only fell out of favour with the shift toward neo-liberalism in the 1970s. Some of the capital controls of this period were downright draconian in contrast with current practice. Indeed, in South Korea, investors were required until the 1980s to secure government permission for holding foreign currency or exporting capital.

This of course depends on what your goals are, and this is a very selective use of history to justify the premise. Notice the U.S. did not practice this policy, as the people are ostensibly in control of the republic via the self correcting mechanism of free elections.

What was forgotten during the neo-liberal era is that many of these explicitly “anti-market” measures helped to promote rapid economic development by increasing financial stability. This is not to say that all controls were successful or that all measures taken to enforce them were appropriate. But that should not distract us from acknowledging their tremendous contributions to unprecedented economic growth and stability during the period.

Cart before the horse. Most of the countries in question did not have much capital to export, and the controls were simply political controls emplaced to prevent the flight of the wealthy few. Stability is the trade-off for freedom of movement and capital. Poltical risk will always and everywhere be a risk in such environments.

Those of us who have long advocated systematic financial reform look at current developments with excitement. Countries need the latitude to impose capital controls that meet their particular needs, and it is a relief to see that they are finally getting it after a long period of debilitating neoliberal ideology.

"Debilitating" in the sense that increased indvidual freedom is antithetical to monolithic governmental authority? This is, like most economic questions, about trade-offs. Who benefits, and who experiences detriment. This commentary leaves ramifications on individual freedom conspicuously absent, and simply assumes that the "good of the country" can be accurately defined, calibrated, and executed by govenmental edict.

Yet periods of transformation are also potentially dangerous, as countries search individually for solutions to problems of unemployment and insecurity that require collective action. There is therefore a pressing need today for a new international financial architecture that at once promotes national policy autonomy while ensuring that diverse national strategies cohere into mutually beneficial co-ordination. Let us hope that leaders of the Group of 20 economies begin a conversation along these lines at its upcoming meetings in Seoul, and then reach out to the developing world more broadly in a process of building a new international financial framework.

Yes, the solution to the current imbroglio is more collective action, more centralized decision making, and a more cohesive international financial architecture. Shumpeter described the process of creative destruction, but here the author has no self-correcting mechanism, steeped in human behavior, that would lend credibility to his belief that cooperation between governments in levying capital controls in an organized manner would engineer the outcomes desired.

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