Capital Controls: Meaning, Types, Benefits and Downside

Capital Controls: Meaning, Types, Benefits and Downside

Cornelius Adablah (PhD) | David Ackah (PhD)

Abstract

Capital controls are when the governments of nations restrict the inflow and outflow of capital into the economy. In a free market economy, there should be and would be no borders. However, this is not the case in reality. Countries want to ensure that their economies stay relatively stable in the long run. Some economies, therefore, impose some form of capital controls. The majority of the economies in the western developed world do not impose capital controls. Instead, economic movement of capital is left to the free will of the markets. However, this is not the case all over the world as a wide variety of capital controls can be found in different countries. Implementing capital controls makes the economy stable. Stability must not be confused with growth here! Capital inflows restrict the inflow of funds into the economy. They do so by scaring the fly by night investors out of the market. Only investors that see long term potential in a country will invest their own money even after capital controls are in place. Thus, since there is a smaller inflow of funds, the outflow is almost negligible. Nearly all the funds that come in the country stay for a long duration of time. Hence, both the upside and downside are bound by a limited range. The biggest benefit of capital controls is that it prevents overheating in economies. This means that it prevents investors from pumping and dumping an economy. Investors cannot flood the economy with funds drive up output and prices and then suddenly leave causing everything to crash! Till domestic investors do not become strong enough to compete with foreign capital, some form of capital controls needs to be in place.

Keywords:  Capital Controls, Implementing capital controls, Capital inflows

Download