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In economics, capital control is the monetary policy device that a country's government (i.e., sovereign power) uses to regulate the flows into and out of a country's capital account, i.e., the flows of investment-oriented money into and out of a country or currency. Capital controls have become more prominent in the years since the Clinton administration blessed the efforts of the world community to create the World Trade Organization (WTO), primarily because globalization has increased the acceleration of currency domain strength, in other words, giving some currencies utility far beyond their physical geographic boundaries.

One characteristic of developed economies is liquid debt markets. Countries that have not built up sufficient savings in their domestic economies are not able to fully realize the complete cycle of capital allocation through markets. This means that when the sovereign governments of those countries need to raise money in order to build infrastructure and otherwise invest in the modernization of their countries, they are unable to sell bonds in their own currencies because there is not enough investment capital available. This leads to what is called "Original Sin ", whereby a developing country finances itself in Dollars (usually), but deploys that capital in its own country and generates tax and other income revenues in its own currency, thus taking on a very dangerous currency risk, that history has shown leads to decades of economic instability and dependence.

The decade since the Asian Currency Crisis in 1997-1998 has rekindled debate over the wisdom of developing markets having capital controls. As globalization advanced with the formalization of the World Trade Organization and Uruguay Round of General Agreement on Tariffs and Trade (GATT), developing countries were urged by the International Monetary Fundmarker and others to liberalize their capital controlled environments.

As it became clear that countries doing this, including Malaysiamarker, Thailandmarker and Mexico, essentially ceded control of their economies to external forces, namely international capital movements, hot money and capital flight; and countries that did not, like the People's Republic of Chinamarker and Indiamarker, retained control and were not nearly as vulnerable to the volatility of international capital movement, some argued that capital controls were advisable for smaller economies to use, and to transition away from them only over long, general evolutionary timelines. Malaysia is an example of a country that switched regimes, from open in the late 1990s, to closed. Economists supporting capital controls in certain cases were not only from the left, but also pro-globalization economists like Jagdish Bhagwati and news publications like The Economist.

Approaches to implement Capital Control

One of the approaches is to use fixed exchange rate regime.

Capital controls by nation

Nazi Germany

    • Nazi Germany attempted to prevent capital from leaving by imposing the Reichsfluchtsteuer Reich Flight Tax or Escape Tax.


During the Asian financial crisis 1997, Malaysia imposed temporary capital control.


During financial crisis 2008-2009, IMF proposed capital control to Iceland.


China is still imposing capital control.

Free movement of capital and payments

See Also

External links


  1. Jagdish Bhagwati (2004) In defense of Globalization. Oxford University Press; pp.199-207
  2. The Economist (2003) A place for capital controls
  3. Expropriation (Aryanization) of Jewish Property

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