Controls on capital flows are damaging and should be avoided, says Professor Forrest Capie of City University Business School in a new paper. Recent calls for such controls are based on the re-emergence of an old fallacy-that there are 'bad' capital movements which can be identified and which can and should be suppressed.
The case for controlling capital movements comes sometimes from economists who want an economy under pressure to have a temporary 'breathing space' from 'destabilising' capital flows. Sometimes they come from the anti-globalisation and anti-capitalism movements which would like permanent controls.
Both are misguided, according to Professor Capie. Capital flows are a powerful force for economic development which ensure that world savings are channelled to their best uses: capital controls strike at the root of those flows. Moreover, such controls are protectionist policies which, like all similar measures, are extremely difficult to remove because they attract a constituency which benefits from them and therefore resists abolition.
Capital controls always cause economic losses, argues Capie, and they seriously damage the credibility of a government's commitment to a market economy. After examining the history of capital flows and capital flows since the late nineteenth century, Professor Capie concludes,
'It is a myth that capital flows are destructive and destabilising: there is no such thing as a bad capital movement, only bad exchange rate systems.' (p102)