Capital Controls

Malaysia’s decision to adopt capital controls in September 1998 reminded the world that there are alternatives to capital account liberalisation. Unfortunately, there has been a tendency for both sides in the debate over the capital control measures to exaggerate their own cases, with little regard for what actually happened. After examining the cases made, and the actual events surrounding the imposition of capital controls, the author concludes that the contribution of the controls to Malaysia’s subsequent recovery cannot be conclusively established. At worst, the controls may have discouraged not only foreign portfolio investment, but also foreign direct investment—which may adversely impact Malaysia’s medium-term competitiveness vis-à -vis the new industrialising economies of Asia, including China and India.