Capital controls constrain the movement of funds into or out of
a country. In the wake of global financial crises these government
actions, which include laws and taxes, have gained greater
[caption id="attachment_67714" align="alignright" width="300"
caption="China wants to make the renminbi a global currency"]
For most of the past four decades,
under the Washington Consensus
, prevailing economic thought moved away from capital controls
and instead supported the free movement of capital as the best
means for encouraging investment and growth.
The 1997 Asian financial crisis was one of the first indicators
that capital controls could play a role in modern economic policy.
India and China, which had significant controls in place, survived
the crisis without serious problems, while countries without such
controls, including South Korea and Thailand, faced structural
economic issues in the following years.
By the time the global economic crisis of 2008 struck, capital
controls had found acceptance by policymakers. When the
International Monetary Fund stepped in to help Iceland through its
crisis, it recommended the country put capital controls in place to
avoid a massive outflow of capital.
After Iceland's action, governments around the world became more
confident that their use of capital controls would not cause the
international economic community to ostracize them. They have
increasingly implemented such controls.
Although many countries have briefly imposed capital controls
for short-term security, there has been significant backlash
using the controls as substitutes for tariffs and
In addition to the headlines that capital controls have made in
Greece and the Eurozone
, they are often discussed in
the context of China
. The People's Republic aims to make the renminbi (
) into a global currency, but to do this it must loosen capital
controls and revalue the currency. This will enable foreign
investors to more easily access the Chinese market, and the Chinese
to make more direct investments abroad.
China currently lags Sweden
in this category. Given that a new special economic zone that
will have no capital controls with Hong Kong is slated
to open in Qianhai in 2020
, it appears the Chinese government has a timeline for the further
loosening of internal and external controls.
Latin America has also made use of capital controls. Over the
past few months, Brazil has earned headlines for
the first moves to loosen its capital controls
since last December, despite threats
of further controls in April
. Argentina has placed
a ban on the purchase of dollars
after capital fled the peso.
Although the international community has not agreed on the best
role for capital controls, these actions suggest they do have a
place in the modern economy.