Capital Controls: Lifeline or Noose?

What are capital controls? Generally, the term applies to any measure that limits cross-border investment. For example, some nations forbid citizens from owning assets such as stocks, bonds or homes abroad. Others limit foreign ownership of domestic assets.

Capital controls require strict limits on currency conversion. To control outflows, for example, a country may have to convert any overseas earnings into local currency, rather than hold dollars, say. Citizens may be limited in how much money they can take out of the country on trips. To limit inflows, governments mignt tax interest payments on short-term deposits from overseas. Developing countries often use controls to stem capital flights – when citizens send savings abroad for higher returns instead of investing them at home.

In theory, capital controls also let governments pursue economic policies appropriate to their internal conditions without worrying about the reaction of global investors. For instance, a country could jack up interest rates to squelch inflation without being deluged by foreign money seeking high yields – which would tend to exacerbate inflation. A country in recession could lower rates without having investors bail out.

That, anyway, is the theory. In practice, most nations have abandoned capital controls because they haven’t made expectations. Take India, which was sometimes held up as a country spared from turbulence by controls. The price of stability had been isolation and poverty. Controls hadn’t stopped rich Indians from moving money abroad – but had discouraged Western investors from bringing in money and technology. So India’s government began lifting the controls.

Capital controls simply can’t work well in a world of free trade and porous borders. If a country has an unattractive investment climate, investors will find ways to get money out – in their underwear, if need be. And investors will work just as hard to get money into a country that seems attractive, as Brazil discovered in the mid-1990s when it fought inflation with high interest rates.

One solution is to erect massive bureaucracies to crack down on illegal money flows. Bureaucracies are usually no match for determined capital exporters, however. One trick is to cheat on invoices: An exporter who wants to invest abroad underbills foreign customers. They pay the full sum owed; the exporter hides the excess over the invoiced amount in foreign assets.

Advocates of capital control acknowledge these drawbacks. But they argue that depressed Asian economies need to lower interest rates to get moving again, and the only way to do that is to wall off their capital markets – at least briefly – from the rest of the world. Says Eugene K.Galbraith, managing director at ABN Amro in Hong Kong: “Capital controls are the kind of things that right-thinking people aren’t supposed to like, but every once in a while they do some good.” Capital controls may help a country to complete economic reforms quickly and reopen its doors to the foreign capital the country needs for long-term growth. But controls may deeply frighten global investors because they amount to a financial Roach Motel: Money can get in, but it can’t get out. Investors are more sympathetic to limits on the flow of capital. Chile, the economic star of South America, requires a portion of incoming money to be parked in a non-interest-bearing account for a year. That limits the hot money coming in so there will be less capital flight later. Putting up a velvet rope to control admission is more inviting than putting bars on the windows to prevent escape.

Business Week

Notes

1. to underbill –отразить в счете заниженную стоимость продаваемого товара
2. Roach Motel – ловушка для тараканов
3. …a company may convert any overseas earnings into local currency, rather than hold dollars, say – разговорная форма построения фразы. “Say” равнозначно по смыслу “for example”. Сравните по-русски: “Скажем, компания может прибегнуть…”
4. to jump-start the economy- дать точок резкому росту экономики

Vocabulary

free-flowing capital -cвободно перемещающийся капитал; сapital inflow (outflow) – приток (отток) капитала; capital movement – движение капитала; to clamp down on capital flows – запретить свободное движение капитала; to stem capital flights – остановить отток капитала; a limit on the flow of capital – ограничение свободного движения капитала

to limit cross-border investments – ограничить иностранные инвестиции

hot money – “горячие деньги”: краткосрочные потоки капиталов, обусловленные стремлением воспользоваться более высоким уровнем процентных ставок, арбитражными возможностями

currency conversion – валютная конверсия: обмен одной валюты на другую

to cheat on invoices – мошенничать со счетом-фактурой

Exercise

Answer the questions:

1. Name various kinds of capital control and their mechanisms.
2. How does the theory differ from the practice of capital controls?
3. Explain the meaning of the phrase:” Putting up a velvet rope to control admission is more inviting than putting bars on the windows to prevent escape”.
4. Interpret the title.

The Yuan Grows Up