Evaluation of capital controls: financial and economic implications

Abstract

It took the international community almost a year to make a fundamental shift towards a more favourable view of the Malaysian capital controls. Their views on capital controls itself, however, remain largely unchanged. In its latest study issued on 8 January 2000, the IMF again derided the use of capital controls. While acknowledging that Chile and Malaysia have used controls effectively, the IMF remains sceptical on the benefits of using controls even when supported by sound macroeconomic policies. Although the controls have had positive impact on the Malaysian economy, we agree that controls are not a solution to all economic problems. If not carefully designed and implemented well, controls would certainly have significant adverse implications on the financial sector and the economy. However, the Malaysian story provides strong evidence that controls do have a positive role in economic management. Its use can reduce the cost of adjustment with minimal adverse effects on the economy. Controls can also be effective in ensuring success of structural reforms.