The Legitimacy of Capital Controls during a Retreat from Globalization

Abstract

Capital controls – measures taken to regulate the outflow or inflow of capital – are employed by governments to maintain financial stability and prevent or mitigate the effects of economic crises. For many decades capital controls were out of favour among economists and policymakers. Of late, however, they have become acceptable, if somewhat controversial, tools of financial policy, with the International Monetary Fund stating that ‘in certain circumstances, [capital controls] can be useful to support macroeconomic adjustment and safeguard financial stability’. Yet, little is known about the legality of capital controls under the various international treaties and rules of international organizations. This article introduces capital controls, traces their evolution over time, considers the success of short-term and long-term controls implemented in Chile, Malaysia, Iceland and China, and examines the consistency of selected controls with international rules and obligations. We suggest treaty language will be the critical factor in determining the legality of a particular capital control under a trade or investment agreement.

Keywords: public international law, international economic law, capital controls, Chile, Malaysia, China, Iceland