The developing case for capital controls

The desirability of free capital movement is an article of faith for the international organisations that seek to govern the global economy. The perspective is shared by the governments of most developed countries. Liberalisation of capital markets is typically part of the medicine prescribed to ailing countries. A weakened country might consider imposing capital controls in a bid to gain some relief from a battering in the global financial markets, but international treaties can stand in its way. This is part of the challenge currently facing Hungary, as discussed by Frances Coppola here.

A month ago I blogged On the wisdom of free capital markets, in which I drew on James K Galbraith and Keynes to argue that an overwhelming emphasis upon retaining the free movement of capital is mistaken. This becomes even clearer when one looks at the issue from a development perspective. Successful development has not been founded upon free capital markets. Free capital markets have led, historically, in a different direction.

Given this starting point, my eye was drawn to an article by Heather Stewart in yesterday’s Observer entitled Financial crisis could turn the tide against unrestricted capital flows. [Read more…]