Relevance of the Capital Control Policies - Essay Sample

Paul Einzig stated Moreover, it may well be asked whether we can take it for granted that a return to freedom of exchanges is really a question of time. Even if the reply were in the affirmative, it is safe to assume that after a period of freedom the regime of control will be restored as a result of the next economic crisis, (Neely, 1999) The statement is as per the pattern established with the capital control whereby they became relevant after World War 1 and during the Great Depression. It is worth noting that the use of capital controls tends to impose limits on the financial capacity of multinational organizations in regards to acquiring labor. Also, when viewed from the neoclassical viewpoints, capital controls are perceived to be damaging policies. Be as it may, history depicts that government have been using the controls for quite some time and hence the need to analyze their significance in regards to the economy. Some of the highlighted reasons that propel the use of capital controls include; generation of revenue and allocation of credit, balancing of crises brought about by payments, and an actual increase in the exchange rate in regards to capital outflows that enable the development of deficits entailing balance-of-payments (Neely, 1999). The authors Christopher J. Neely in his article An Introduction to Capital Controls, Michael R. Crittenden in his article IMF Report: Capital Controls Remain Country-Specific Issue and James Saft in his article the rise and rise of capital controls present various perspectives regarding the influence of capital control.

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According to Michael Crittenden, Worldwide financial pioneers ought to keep on encouraging a more liberal stream of capital crosswise over outskirts (Crittenden, 2012). Nonetheless, for key developing markets, for example, China, the procedure ought to be precisely dealt with as per the report issued by the International Monetary Fund. The report that was organized by the members of staff of the IMF highlighted that capital controls are not generally to be disapproved off because, during cases of an emergency, they can give people in authority time to reestablish steadiness. Furthermore, the report indicated complete advancement of capital streams might by a bad embargo in steps made by a country. Crittenden incorporates the views of economists who assert that the relevant stage of progression for a country would rely on given conditions in retrospective to whether a country has particular limits that are put a side for the purpose of improving their budgets (Crittenden, 2012).

The author explains that the flows of capital have transformed to issues of interest among the international business heads after the financial crisis that took place in 2008. It is worth noting that flow of capital as risen in regards to volatility across countries among the upcoming markets. According to the staff of the IMF, caution needs to be taken for countries that are shifting to eliminating limitations on movements of capital at the cross-borders. The staff highlighted China and India that are perceived to have outstanding and new market economies. Furthermore, both countries have no option but to adapt to the steady economy modernization that limits the use of controls for the purpose of giving support to their significant aspects when it comes to the economy of the world (Crittenden, 2012).

The author Crittenden brings into perspective China as highlighted in the reports by the IMF where the staff asserts that applying capital control will enable Beijings economy to shift from a model that is driven by its exports to a model that is relatively balanced. The IMF staff perceives that the controls might push the Yuan such that it competes with the dollar in the international market. He quotes the IMF staffs who explain that China would succeed with liberalization in its flow of capital such that it benefits more from the capital flows while reducing its risks. He explains that the report asserts that both Chinese administrators should put into perspective a monetary system that is monetary, making the exchange rate more flexible in addition to making improvements on risks associated with the financial markets. The author puts emphasis on the interest of the international leaders in Beijings financial markets regarding the maintenance of the Yuan (Crittenden, 2012).

James Saft begins his article with the assertion, Look for a flood of new capital controls in 2011 as emerging market states seek a measure of protection against the easy money being generated by the United States, Europe, and Japan, as a way of illustrating the relevance of capital controls in the economy of a country. He describes capital controls as aspects that were never fully tapped. He supports his argument with the fact that emerging economies such as Thailand, Indonesia, Brazil, and Korea have already employed capital controls for those that bring or take money out of the country in addition to the affiliated reasons (Saft, 2011).

He asserts that the associated motivation is the aspect of controlling the flow of hot money (Saft, 2011). His perspective is that the highest percentage of the amount is generated from the monetary policies found in the developed countries that pose risks to their economies such that they increase the value of the currencies such that there is little competition in the domestic market. He uses the examples of Korea and Brazil whereby Korea associated itself with a levy linked to the debt of the foreign currency while Brazil experienced a tripling of taxes from its international capital such that it moved from two percent to six percent. In other words, capital controls assist emerging economies to become independent rather than depending on the hegemonic markets. They obtain stability in their finances such that they do not become burdened with foreign debts (Saft, 2011). The writer further explains that nations have always been caught up at crossroads in regards to three basic factors that include; an uncontrolled flow of capital, the independence in having an individual monetary policy and also an exchange rate that is inflexible. He explains that a country can only have two of the factors as maintaining the three is impossible (Saft, 2011).

Christopher J. Neely in his article An Introduction to Capital Controls goes into deep detail on the history of Capital controls in regards to their purposes and their influence in todays economy (Neely, 1999). The author asserts that the presence of capital control has been perceived to be problematic in regards to proficiency in the economy with the view that the control limited the utilization of productive resources in areas that urgently required them. With this perspective, the use of capital control was eliminated in the 70s and 80s in the developed countries. The immense pressure also made the underdeveloped countries to reconsider them during the 90s in order to eliminate the limitations. Nonetheless, in the recent years, their uses have been put into perspective. One of the reasons is the recalling of the aspect of huge flows of capital in regards to the trading of assets in developing nations between the 80s and the 90s such that policy makers faced a lot of challenges. The second reason is that in the 90s, there was a chain of financial crises that include; the European Monetary System that took place between 1992 and 1993, the Mexican crisis that took place in the year 1994, the Asian crisis that took place between 1997 and 1998. The chain of events called for attention or rather made the necessity of taking precautions on the transactions of assets that resulted in their occurrences (Neely, 1999).

In regards to the history of the capital controls, Neely explains that the first utilization of the policies took place during World War 1 through the efforts of the belligerents who aimed at maintaining a balance on the tax kitties to cater for the expenditures during the period of war (Neely, 1999). After the war was over, the controls stopped being utilized but later resurfaced when the Great Depression struck the U.S. in the 30s. During both pressurizing periods, the reason for employing the controls was to increase the capacity of countries to spur on their economies while avoiding the risks associated with capital flight. Evidence indicating the use of capital controls was in the Articles of Agreement of the International Monetary Fund with the approval of a sign made in 1944 at the conference in Bretton-Woods. It is worth noting that the IMF was considered to be a part of capital control in the 40s (Neely, 1999).

Individuals such as John Maynard Keynes highly emphasized the use of the controls while in the era of Bretton-Wood that focused mostly on inflexible exchange rates, most countries imposed limits on transactions associated with assets for the purpose of coping challenges brought about by balance-of-payments. It is worth noting that the limitations resulted in the identification of costs and alterations such that developed countries steadily removed the controls. A good example is the U.S. whereby in 1974, it stopped using its popular controls. Ten years down the line, the underdeveloped countries followed the same route and stopped using the control policies. Before identifying the different capital control policies used by states to manage and contain global capital, it is important to understand what capital control policies are and the uses of the capital control in regards to the reasons as to why they were put up in the first place (Neely, 1999).

Neely (1999) describes a capital control as a policy that was formulated to impose or place limits on capital when it comes to transactions in an account. It is worth noting that capitals controls tend to differ and that they may be employed for various uses. Examples of control include; price controls, taxes, controls on quantity and even complete limits when it comes to assets transacted in international trade (Neely, 1999). The author explains that one of the reasons for developing the capital controls includes generation of revenue and allocation of credit. The occurrence of the First World War resulted in the need for establishing capital controls as an approach of financing the efforts used in the war. During the initial stages of the war, the involved powers put on hold their involvement in the gold standard in regards to the duration of the war. However, they retained the rates involved in the fixed-exchanges (Neely, 1999). The belligerents imposed limits on the outflows of capital and the obtaining of loans or assets from other nations. One of the significant aspects regarding the restrictions or limitations was the increase in revenue. Revenue was raised in two main ways with the first method being maintaining capital within the economy of the nation such that it aided in the issuing of taxes on the incomes on interests and also wealth. The second method in which revenue increases was permitting an inflation rate that was very high and hence creating a high amount of revenue. Furthermore, the controls resulted in the decrease of the rates associated with interest such that the costs associated with government borrowing are attributed as its debt. It is worth noting that even after the First World War, control have been imposed on capital outflows with the same purposes of obtaining revenue for the administrations and receiving permits that enable them to provide loans to the nationalities such that risks associated with capital flight are not experienced ; especially in emerging economies (Neely, 1999).

The author also brings...