Exchange Rate Regimes and Institutional Arrangements in the Shadow of Capital Flows


Whatever the ultimate verdict on that issue, the Malaysian experience with capital controls (not just the 1998 controls, but also the earlier restrictions on inflows in 1994) demonstrate two things: (a) capital controls can be made effective (in the sense of driving a wedge between onshore and offshore interest rates) with minimal corruption and rent-seeking; (b) capital controls on short-term flows can be implemented with minimal disruption to direct foreign investment (i.e., without scaring away the investors that one really cares about). This experience, I think, puts to rest several counter-arguments about controls: that markets can easily evade controls; that controls have to be so heavy-handed that they come with great costs to the real economy; that they are necessarily prone to corruption and rent-seeking; that it is impossible to segment short-term flows from direct foreign investment.


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