The Role of Capital Controls in Financial Crises
(1999) 11 Bond Law Review 231
13 Pages Posted: 15 Jun 2017
Date Written: January 01, 1999
In the past thirty years portfolio capital flows have come to prominence, far eclipsing trade flows in volume and significance. In particular, transnational capital flows came to prominence in our region as one of the contributing factors to the Asian economic crisis that commenced in 1997. However, as Frank Partnoy has pointed out: lawyers and legal academics are largely absent from the debate about financial crises. The commentary is dominated by economists, many of whom unfortunately vastly oversimplify or even misunderstand the role of law in recent crises.
Partnoy’s complaint is a good one. We lawyers need to get involved. Lawyers need to understand the factors that contribute to financial crises because they have to be intimately involved in the drafting and implementation of measures designed to prevent, or at least ameliorate, such crises. Poor prudential regulation and poor corporate governance standards were each significant contributing causes to the Asian crisis and their upgrading will require the extensive involvement of lawyers. Likewise, a major debate has been in progress, with virtually no input from lawyers, on the role of capital controls in allowing countries the capital they want, while deterring the capital they don't want. Yet capital controls, when applied, have to be drafted, and ultimately enforced, by lawyers.
This article critically assesses such capital controls and the role they can play in contributing to a more stable international financial system.
In broad terms, capital controls can be either restraints on foreign exchange transactions or on capital account transactions and, if the latter, can be placed on capital inflows or capital outflows. These restraints can, in their turn, take the form of taxes or quantitative restrictions. A detailed analysis of the full gamut of available capital controls is beyond the scope of this work, and has been well done elsewhere. I will focus on capital account controls, and, in particular on the capital inflow controls imposed by Chile from 1991 to 1998 and the capital outflow controls imposed by Malaysia in 1998.
Keywords: Capital flows, trade flows, capital controls, financial crisis, international financial system Chile, Malaysia
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