The Global Economy in Turbulent Times

CHAPTER 68 The “Trilemma” of Capital Controls¹

Chapter 65 examined principles underlying the international monetary system (IMS) as we know it today. I also explained why the IMS isn’t working and what’s really wrong with it. In this chapter, I want to dwell on one of these principles, namely, the free international movement of goods, services, and capital. We have since come a long way in freeing the movement of goods and services. As a result, currencies of many emerging nations are today readily convertible for current transactions of the balance of payments (BOP). Unfortunately, failure at the Doha Round to further liberalize trade is a setback.

Convertibility on capital transactions remains an issue. First, some history: In the intermediate years after World War II (WWII), controls on capital movements were common. Unlike today’s controls directed at slowing down massive inflows of capital, however, these postwar controls mainly aimed at slowing down outflows. After the United Kingdom lifted exchange controls under Margaret Thatcher in 1979, more governments have come to allow freer movement of money into and out of their economies. While increasingly free capital flows can help spur economic growth by enabling the flow of more productive investment, the growing volume of inflows into emerging nations has raised concerns. Today, capital controls refer to taxes or other administrative measures meant to regulate those flows.

Exchange control directly violates one of the ...