Money and Banking Capital Controls in Developing Essay

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Money and Banking

Capital controls in developing countries

According to the Investopedia (2013), capital control is seen as any measure that is taken to control the flow of foreign capital into or even out of the domestic economy an these measures are always taken by the central banks or the governments. These controls normally come in the form of tariffs, volume restrictions, taxes, outright legislations and other market-based forces and these controls do affect several classes of assets like the equities, foreign exchange trades and even bonds. Apparently tight capital controls are common among the developing nations since their capital reserves are comparatively lower and hence more volatile.

There have been a lot of discussion on the positives or negatives of capital controls especially among the developing economies. There are a good number of economists who feel that the controls inherently limit the progress of the economies and their efficiency yet other take it that the controls are a prudent way of shielding the economy and a measure that adds safety to the developing economies. It is worth noting that most developed economies adopt a liberal approach to capital control though they also have stopgap measures instituted to prevent mass exodus of capital/outflows particularly in times of crisis and also have measures to guard against gross speculative assault on their individual currencies.

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However, there are some global forces that have led to integration of the financial markets and in effect led to easing of capital controls, this has opened up the economy to foreign capital and allowing firms to easily access capital hence a rise in the overall demand for domestic stocks.

As Marcos Chamol et, al (2010) indicated, there are situations where the capital controls are proper and fit for the developing economies. They argue that capital inflows are only needed and essential when the economy needs financing for productive investment and diversification of the risks. Though, when this is not the situation and sudden temporary surges are experienced and these could affect the volatility of the micro economy then capital controls are a good tool for the developing economies to use. For instance, the recession that hit the globe in 2008 saw more than $200 billion drop in outflow of this amount to the emerging markets. In this situation, the emerging markets could use the capital controls to shield their economies from further losing funding.

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