From History Of Capital

If one is opposed to the use of capital controls by developing economies as a method of both protecting such economies from impending crisis, as well as a tool to facilitate recovery, it follows that their must be other methods that would work in capital control’s stead. Moreover, opponents of capital controls ultimately argue that not only do capital controls not work as well as other methods, but they also create harm to the long-term economy of the country imposing such regulations. Thus, this section will discuss the purposes behind capital controls and the alternative measures that are most often used to facilitate recovery of economies in crisis and compare these to capital controls.

Capital controls are measures taken by governments intended to limit capital transactions or refocus them inward to the economy of the country imposing the controls. These controls can take many forms and can be intended to address various ills of an economy. Typically, these measures are taken through taxation, price and quantity control, or prohibitions on cross-boarder trading.

Beyond generating revenue and preventing the flight of capital, capital controls have also been used to address balance of payments crises. When, at a given exchange rate, a country wishes to buy more from the rest of the world than those other countries wish to buy from it, the country has a balance of payments deficit. If the country with the deficit does note impose some combination of exchange rate and monetary policy to rectify the situation the excess demand for the foreign products will drive up their prices due to the devaluation of the country’s currency. The prices would continue to rise, and the domestic currencies continue to fall, until the deficit was eliminated.