An overview of capital controls in an era of globalization.
Written in 2005; 2,600 words; 6 sources; MLA; $ 78.95
Paper Summary:
Within the framework of a globalized political economy, aiming towards the eradication of any and all artificial barriers to trade, the question of capital liberalization has become an increasingly critical one. Consequent to the free trade philosophy of globalization, the IMF and World Bank have always argued against the implementation of capital controls or the imposition of barriers towards the free movement of capital across the world. This paper explains that such barriers are negatively perceived as threats to globalization or obstacles to the realization of a global economic system. This paper shows that several member countries, especially those impacted by the Asian financial crisis, adopted a contrary policy, whereby they either tightened existing controls on either capital outflow or inflow or adopted even more stringent capital control mechanisms. Such a policy appears to be contrary to the goal of establishing a liberalized and stable global capital market, functioning in accordance with the principles of rational choice and comparative advantage. However, careful assessment of the arguments for and against capital controls in this paper, together with a review of a pertinent body of factual formal evidence, illustrates that the imposition of capital controls, as opposed to the full liberalization of the global capital market, better serves the purposes of capital market stabilization, efficient allocation of resources, and protection of national economies.
From the Paper:
"The third argument in favour of capital liberalization is intimately connected to the factor of financial instability and the importance of equilibrating balance of payments. As noted by Sebastian Edwards (1999), all economies are vulnerable to such external shocks as would upset balance of payments. In order to redress that situation and minimize its negative consequences, it is necessary to balance the current account through capital movements as would restore the equilibrium of the balance of payments and offset potential inflation. The free and unrestricted global movement of capital is, thus, a necessary corollary to the maintenance of balanced current account (Edwards 1999). Consequently, from within the parameters of this last argument, liberalization of capital and the concomitant creation of a thoroughly globalized capital market is strongly founded upon the imperatives of maintaining balanced current accounts."
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