For and against Capital controls

Full freedom of movement for capital and payments has so far only been approached between individual pairings of states which have free trade agreements and relative freedom from capital controls, such as Canada and the U.S., or the complete freedom within regions such as the European Union, with its "Four Freedoms" and the Eurozone. During the first age of globalization that was brought to an end by World War I, there were very few restrictions on the movement of capital, but all major economies except for Great Britain and the Netherlands heavily restricted payments for goods by the use of current account controls such as tariffs and duties.^[8]

[edit]Arguments in favour of free capital movement

Pro free market economists claim the following advantages for free movement of capital:

• It enhances the general economic welfare by allowing savings to be channelled to their most productive use.^[28]
• By encouraging foreign direct investment it helps developing economies to benefit from foreign expertise.^[28]
• Allows states to raise funds from external markets to help them mitigate a temporary recession.^[28]
• Enables both savers and borrowers to secure the best available market rate.^[12]
• When controls include taxes, funds raised are sometimes siphoned off by corrupt government officials for their personal use.^[12]
• Hawala-type traders across Asia have always been able to evade currency movement controls
• Computer and satellite communication technologies have made Electronic funds transfer a convenience for increasing numbers of bank customers.

[edit]Arguments in favour of capital controls

Pro capital control economists have made the following points.

• Capital controls may represent an optimal Macroprudential policy that reduces the risk of financial crises and prevents the associated externalities.^{[3] [50] [62] [63]}
• Global economic growth was on average considerably higher in the Bretton Woods periods where capital controls were widely in use. Using Regression analysis, economists such as Dani Rodrik have found no positive correlation between growth and free capital movement.^[28]
• Capital controls limiting a nation's residents from owning foreign assets can ensure that domestic credit is available more cheaply than would otherwise be the case. This sort of capital control is still in effect in both India and China. In India the controls encourage residents to provide cheap funds directly to the government, while in China it means that Chinese businesses have an inexpensive source of loans.^[23]
• Economic crises have been considerably more frequent since the Bretton Woods capital controls were relaxed. Even economic historians who class capital controls as repressive have concluded capital controls, more than the period's high growth, were responsible for the infrequency of crisis.^[23] Studies have found that large uncontrolled capital inflows have frequently damaged a nation's economic development by causing its currency to appreciate, by contributing to inflation, and by causing unsustainable economic booms which often precede financial crises - caused when the inflows sharply reverse and both domestic and foreign capital flee the country. The risk of crisis is especially high in developing economies where the inbound flows become loans denominated in foreign currency, so that the repayments become considerably more expensive as the developing country's currency depreciates. This is known as original Sin (economics).^[8][64][65]