Capital controls

By
Shan Saeed
-
19
310

Currency war, capital controls, regional trade and protectionist policies would be the hot topics in the years to come. Countries are worried about their exports, employment, productivity and GDP growth. Not a single country is willing to let her currency appreciate that would hurt exports. Countries like Brazil, Thailand, South Korea, Saudi Arabia, Singapore, and Switzerland have recently imposed capital controls in one form or the other. In my humble opinion, capital controls are not effective in curbing currency appreciation. Currency appreciation can be controlled through strategic implementation of monetary and fiscal policies. However, many countries have failed to comprehend the tools of macro-economics that can be very useful in getting down to the crux of the issue.
Currency appreciation is normally seen as hurting exports, decreasing productivity, increasing unemployment and creating lower than expected GDP growth rate. Thus nations are worried not to let their income levels down i.e. GDP growth. Once currency starts to appreciate, it makes exports expensive, imports cheaper and sends policy makers wondering as to how to control rising currency.
Singapore government has recently taken measures of capital controls, 10 per cent tax on property papers bought by foreigners. Brazil have imposed tax on bond purchased by foreigners, Thailand and South Korea have done the same. Saudi Arabia imposed capital controls on foreign remittances. Foreigners working in Saudi Arabia can only send 10 per cent of the total deposit amount in their bank accounts as remittance back home. Switzerland intervened in the currency market and pegged its rate against USD. Investors, high net-worth clients, speculators and people who are looking for wealth protection have taken position in various currencies including Brazilian Real, South Korea Won, Swiss Franc to name a few. So the question arises, are capital controls effective in controlling rising currency? According to IMF and World Bank research reports, capital controls are short term solutions but not a long term one. Hence, capital controls are not effective in taming rising currency. These two policies are the real key in controlling rising currency or taming strong currency. Having studied with a Nobel Laureate at University of Chicago, Prof Gary Becker and respected Prof John Huizinga at Chicago School, I strongly feel that monetary policy and fiscal policy are the real solution to currency appreciation containment. How does it work in the real world?
Monetary Magic – Central bank can start printing money or using quantitative easing method or expand balance sheets in order to bring down the value of the currency. In this way, monetary inflation will rise and the currency appreciation impact will die down soon as more supply of the local currency comes in the financial market.
Fiscal Magic – Government can undertake huge projects with strong return-value focus in order to create employment and buttress economic activity. Once the government starts these projects like infra-structure development, up-gradation of hospital services, restoration of historical sites, building of new departments at universities, updating military hardware or investment on bureaucratic knowledge base or capacity enhancement activities; it would let the economic ball rolling. These investments would require local currency utilisation and keep the currency from rising fast.
These ventures would send a signal to the investors globally who might be interested in taking position in currencies viewed as strong to consider macro-audit of their asset allocation or investment portfolio for the long run before making investment in the strong currency. Governments can adopt any one of the two approaches mentioned in order to meet the challenge of rising currency. Chile is often quoted as the best example to take control of the rising currency in 1998. However, some people mention about Malaysia’s capital controls to be effective as well. Again, I would say it depends on the individual country and her regions location. In the coming years, I would say that currency manipulation or undervalued currency or currency dumping might become a bone of contention among many countries as they compete quite fiercely in the global trade market to win market share going forward. Are you ready for protectionist policy or capital controls phenomenon? The business magazine/financial newspapers would run many articles on capital controls as we move forward for the next 3-years.

The writer is a financial market economist with 12 years of solid global experience based in Asia Pacific. He has graduated from Uni of Chicago, Booth School of Business, USA and IBA Karachi. He can be reached at [email protected]. Blogs at www.economistshan.blogspot.com

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19 COMMENTS

  2. Shan
    This is the gist of the global economic tension among countries

    Ghazala Hameed
    California, USA

  3. Shan
    Very practical and logical.I have gained a lot of insight with your artilce

    Yazman Toor
    Dubai, UAE

  4. This is happening at the moment. Shan, you have mentioned some true facts. Loved your article.

    Susan Marshall
    New York, USA

  6. Our economists have great insight about global markets. Enjoyed your article shan

    Haris Mehmood
    Karachi

  9. Capiital controls and protectionist policies would be the hot topics in the next 2-years. I agree with you Shan

    Arun Lal
    Singapore

  11. Superb article..Can IMF implmment this strategy for countries with appreciating currencies. Shan, marvellous is one word for you.

    Koo Wei Lee
    Singapore

  12. Shan
    I have been following your articles, your insight is fabulous….You are an erudite eonomist..Chicago style.

    Sheila Hideth
    Chicago, USA

  13. Shan
    You have made some complex issue look very simple. Countries can learn a lot from this piece..

    Yanina Cooper
    London

  14. Excellent analysis by shan…Hit the nail in the coffin when he said protectionist policies would rule the world. Economist magazine in its latest issue mentioned brazil complaining about china.

    Fatima Harris
    London

  17. Am I the only one who disagrees with this approach?

    Let me explain my position. Here's what GDP is composed of
    GDP = private consumption + gross investment + government spending + (exports − imports)

    If you are going to base your GDP growth on Net exports, by shifting monetary value from the rest of the GDP components via inflation (currency devaluation), how is that going to help the local economy?

    Key is stability and trust. There is no stability of the PKR in the forex market. and no trust in the Govt.

    It would be unfair to criticize without giving a solution. Here's my solution.

    Govt needs to reduce its mandate, its expenses, its ministries. And a Sound Rupee policy has to be restored. Export value needs to be put back into the PKR. PKR needs to appreciate! An Economy should NOT be based on EXPORTS but a balance of Investment and Consumption. Economic efficiency should support export.

    Here's my view in restoring strength to the PKR. http://www.scribd.com/doc/76724353/The-flawed-Bal…

    • Shan is talking about global issue and not just Pakistan. Read the article carefully..You have missed the point.

      Susan Bain
      New York, USA

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