Gerald Epstein

Ilene Grabel

English

Research Papers in Economics

 
 
 
 
 
 
Capital Management Techniques in Seven Developing Countries 
During The 1990s: Lessons For Policymakers
* 
 
Gerald Epstein and Ilene Grabel 
April 2003 
 
Research Brief 2003-3 
 
 
Introduction 
 
Following the Asian crisis of the late 1990's, there has been a renewed interest in the role 
of capital controls in developing countries within both policy and academic circles. The reasons 
for this interest are not hard to find. Even strong proponents of capital account liberalization have 
acknowledged that many countries that avoided the worst effects of recent financial crises were 
also those that used capital controls, including China, India, Malaysia and Chile. Consequently, 
prominent mainstream economists and even the IMF have relaxed their insistence that immediate 
capital account liberalization is the best policy for all countries in all circumstances (IMF 2000, 
Fischer 2002) Adding momentum to the discussion over the last several years, a number of 
highly respected economists have actively argued in favor of capital controls (e.g. Bhagwati 
1998, Stiglitz 2002, Krugman 1998, Rodrik 1998), adding their voices to the many heterodox 
economists who have argued for controls for many years (e.g. Crotty and Epstein 1996, Pollin 
1998, Felix 2001, Grabel 2002). 
 
Despite this apparent increase in the tolerance for capital controls, most mainstream 
academic and policy economists remain quite skeptical about the viability and desirability of 
controls, at least in two specific senses. Whatever increased tolerance for capital controls exists 
applies to controls on inflows, not on outflows. Moreover, controls on inflows are generally seen 
                                                 
*   This PERI Research Brief is based on our paper Capital Management Techniques In Developing Countries: An 
Assessment of Experiences from the 1990's and Lessons For the Future prepared for the G-24 by Gerald Epstein, 
Ilene Grabel and Jomo, K.S. http://www.umass.edu/peri/pdfs/WP56.pdf. Gerald Epstein is Co-Director of PERI and 
Professor of Economics at the University of Massachusetts, Amherst. Ilene Grabel is Associate Professor of 
International Finance at the Graduate School of International Studies, University of Denver. We thank Arjun 
Jayadev and Peter Zawadzki for excellent research assistance and the Ford and Rockefeller Foundations and the G-
24 for financial support.   2
as a “temporary evil,” useful only until all of the institutional pre-requisites for full financial and 
capital account liberalization are in place. 
 
Regardless of economists' misgivings, many countries nevertheless employ capital 
controls of various kinds to achieve important policy goals. Our study presents intensive case 
studies of seven developing countries that maintained a variety of controls over capital inflows 
and outflows during the 1990s (Epstein, Grabel, Jomo 2003). 
 
 
Capital Management Techniques 
 
Departing from common practice in this literature, we found it useful to broaden the 
study of "capital controls" beyond its normal limits. More specifically, we investigated what we 
term capital management techniques, referring to two complementary (and often overlapping) 
types of financial policies:  policies that govern international private capital flows and those that 
enforce prudential management of domestic financial institutions. We argue that certain types of 
prudential financial regulations actually function as a type of capital control; moreover, capital 
controls themselves can function as or complement prudential financial regulations.  Our 
research demonstrates that there is often a great deal of synergy between prudential financial 
regulations and traditional capital controls. We also find that it can be difficult (and sometimes 
impossible) to draw a firm line between prudential domestic financial regulation and capital 
controls.  For instance, domestic financial regulations that curtail the extent of maturity or 
locational mismatches may have the effect of influencing the composition of international capital 
flows to a country, even if those types of regulations are commonly classified as prudential 
domestic financial regulations and not as capital controls. Hence, for the IMF and others to argue 
that prudential management is “good” and capital controls are “bad” is to draw a distinction for 
ideological, rather than sound policy purposes. 
 
 
The Case Studies 
 
We undertook seven case studies of the diverse capital management techniques employed 
in Chile, Colombia, Taiwan Province of China, India, China, Singapore and Malaysia during the 
1990s. Regimes of capital management take diverse forms and are multi-faceted. Importantly, 
capital management techniques can be static or dynamic.  Static management techniques are 
those that authorities do not modify in response to changes in circumstances.  Capital 
management techniques can also be dynamic, meaning that they can be activated or adjusted as 
circumstances warrant. Tables 1 and 2 summarize the main results from our case studies.   3
Table 1 
Types and Objectives of Capital Management Techniques Employed During the 1990's 
 
Country  Types of Capital Management Techniques  Objectives of Capital Management 
Techniques 
Chile 
Inflows 
- FDI and PI: One year Residence Requirement  
- 30% URR 
- Tax on foreign loans: 1.2% per year 
Outflows: No significant restrictions 
Domestic financial Regulations:  
- strong regulatory measures 
- lengthen maturity structures and 
stabilize inflows 
- help manage exchange rates to 
maintain export competitiveness 
- protect economy from financial 
instability 
Colombia  Similar to Chile  Similar to Chile 
Taiwan POC 
Inflows 
non-residents 
- bank accounts can only be used for domestic spending, 
not financial speculation 
- foreign participation in stock market regulated 
- FDI tightly regulated 
residents 
- regulation of foreign borrowing 
Outflows 
- Exchange controls 
Domestic Financial Regulations 
- restrictions on lending for real estate and other 
speculative purposes 
- promote industrialization 
- help manage exchange for export 
competitiveness 
- maintain financial stability and 
insulate from foreign financial crises 
Singapore 
"Non-Internationalization" of Singapore $ inflows 
 
outflows 
non-residents 
- financial institutions can't extend S$ credit to non-
residents if they are likely to use for speculation 
- non-residents: if they borrow for use abroad, must swap 
first into foreign currency 
Domestic Financial Regulations 
- restrictions on creation of swaps, and other derivatives 
that could be used for speculation against S$ 
- to prevent speculation against 
Singapore $ 
- to support "soft peg" of  S$ 
- to help maintain export 
competitiveness 
- to help insulate Singapore from 
foreign financial crises 
Malaysia 
(1998) 
Inflows 
- restrictions on foreign borrowing 
Outflows 
non-residents 
- 12 month repatriation waiting period 
- graduated exit levies 
- inversely proportional to length of stay 
residents 
- exchange controls 
domestic financial regulations 
non-residents 
- restrict access to ringgit 
residents 
- encourage to borrow domestically and invest 
- to maintain political and economic 
sovereignty 
- kill the offshore ringgit market 
- shut down offshore share market 
- to help reflate the economy 
- to help create financial stability and 
insulate the economy from contagion 
   4
Table 1, cont. 
Country  Types of Capital Management Techniques  Objectives of Capital Management 
Techniques 
India 
Inflows 
non-residents 
- Strict Regulation of FDI and PI 
Outflows 
non-residents 
- none 
residents 
- exchange controls 
Domestic Financial Regulations 
- strict limitations on development of domestic financial 
markets 
- support industrial policy 
- pursue capital account liberalization 
in an incremental and controlled 
fashion 
- insulate domestic economy from 
financial contagion 
- preserve domestic savings and forex 
reserves 
- help stabilize exchange rate 
China 
Inflows 
non-residents 
- strict regulation on sectoral FDI investment 
- regulation of equity investments: segmented stock 
market 
Outflows 
non-residents 
- no restrictions on repatriation of funds 
- strict limitations on borrowing Chinese Renminbi for 
speculative purposes 
residents 
- exchange controls 
Domestic Financial Regulations 
- strict limitations on residents and non-residents 
- support industrial policy 
- pursue capital account liberalization 
in incremental and controlled fashion 
- insulate domestic economy from 
financial contagion 
- increase political sovereignty 
- preserve domestic savings and 
foreign exchange reserves 
- help keep exchange rates at 
competitive levels 
Sources: See Epstein, Grabel and Jomo (2003). 
 
What general policy lessons of these seven experiences?  The most important of these 
are: 
 
1. Capital management techniques can enhance overall financial and currency 
stability, buttress the autonomy of macro and micro-economic policy, and bias 
investment toward the long-term. 
 
2. The efficacy of capital management techniques is highest in the presence of 
strong macroeconomic fundamentals, though management techniques can also 
improve fundamentals. 
 
3. The nimble, dynamic application of capital management techniques is an 
important component of policy success. 
 
4. Controls over international capital flows and prudential domestic financial 
regulation often function as complementary policy tools, and these tools can 
be useful to policymakers over the long run. 
 
5. State and administrative capacity play important roles in the success of capital 
management techniques. 
   5
6. Evidence suggests that the macroeconomic benefits of capital management 
techniques probably outweigh their microeconomic costs. 
 
7. Capital management techniques work best when they are coherent and 
consistent with a national development vision. 
 
8. There is no single type of capital management technique that works best for all 
developing countries.  Indeed our cases, demonstrate a rather large array of 
effective techniques. 
 
 
Lessons for Policymakers 
 
  The most important lesson of our study is that during the last decade policymakers in 
diverse developing countries have successfully used a variety of capital management techniques 
to achieve important economic objectives. Global financial integration has not frustrated these 
policies, and the countries that maintained them never became pariahs in international capital 
markets.  Policymakers in other developing countries would do well to build upon the lessons of 
these recent successful experiences. 
 
Table 2 
Assessment of the Capital Management Techniques Employed During the 1990s 
 
Country Achievements Supporting  Factors  Costs 
Chile 
-altered composition and 
maturity of inflows 
-currency stability 
-reduced vulnerability to 
contagion 
-well-designed policies 
and sound fundamentals 
-neoliberal economic 
policy in many domains 
-offered foreign 
investors good returns 
-state and administrative 
capacity 
-dynamic capital 
management 
-limited evidence of 
higher capital costs 
for SMEs 
Colombia 
-similar to Chile, but less 
successful in several respects 
-less state and 
administrative capacity 
than in Chile meant that 
blunter policies were 
employed 
-economic reforms in 
the direction of 
neoliberalism 
 
no evidence 
available 
   6
Table 2, cont. 
Country Achievements Supporting  Factors  Costs 
Taiwan POC 
-debt burdens and financial 
fragility are insignificant  
-competitive exchange rate and 
stable currency 
-insulated from financial crises 
-enhanced economic 
sovereignty 
-high levels of state and 
administrative capacity 
--policy independence 
of the CBC 
-dynamic capital 
management 
-limited evidence 
of concentration of 
lending to large 
firms, 
conservatism of 
banks, inadequate 
auditing and risk 
and project 
assessment 
capabilities 
-large informal 
financial sector 
-limited evidence 
of inadequate 
liquidity in 
financial system 
Singapore 
-insulated from disruptive 
speculation 
-protection of soft peg 
-financial stability 
-strong state capacity 
and ability to use moral 
suasion 
-strong economic 
fundamentals 
 
-possibly 
undermined 
financial sector 
development 
-loss of seignorage 
Malaysia 
1998 
-facilitated macroeconomic 
reflation 
-helped to maintain domestic 
economic sovereignty 
-public support for 
policies 
-strong state and 
administrative capacity 
-dynamic capital 
management 
-possibly 
contributed to 
cronyism and 
corruption 
India 
-facilitated incremental 
liberalization 
-insulated from financial 
contagion 
- helped preserve domestic 
saving 
-helped maintain economic 
sovereignty 
-strong state and 
administrative capacity 
-stong public support 
for policies 
-experience with state 
governance of the 
economy 
-success of broader 
economic policy regime 
-gradual economic 
liberalization  
-possibly hindered 
development of 
financial sector 
 
-possibly 
facilitated 
corruption 
China 
-facilitated industrial policy -
insulated economy from 
financial contagion 
-helped preserve savings 
-helped  manage exchange rate 
and facilitate export-led growth 
-helped maintain expansionary 
macro-policy 
-helped maintain economic 
sovereignty 
-strong state and 
administrative capacity 
-strong economic 
fundamentals 
-experience with state 
governance of the 
economy 
-gradual economic 
liberalization 
-dynamic capital 
management 
 
-possibly 
constrained the 
development of 
the financial sector 
-possibly 
encouraged non-
performing loans 
-possibily 
facilitated 
corruption 
Sources: See Epstein, Grabel and Jomo (2003). 
   7
References 
 
Bhagwati, J., 1998. “The Capital Myth:  The Difference Between Trade in Widgets and Dollars,” 
Foreign Affairs. vol. 77, n. 3, pp. 7-12. 
 
Crotty, James and Gerald Epstein, 1996. "In Defense of Capital Controls". Socialist Register. 
 
Epstein, Gerald, Grabel, Ilene and Jomo, K.S. 2003. "Capital Management Techniques In 
Developing Countries: An Assessment of Experiences from the 1990's and Lessons For the 
Future" G-24 Technical Paper. http://www.umass.edu/peri/pdfs/WP56.pdf 
 
Felix, David, 2001. "Why International Capital Mobility Should Be Curbed, and How it Could 
be Done." Political Economy Research Institute (PERI). www.umass.edu/peri/ 
 
Fischer, S., 2002."Financial Crises and Reform of the International Financial System". NBER 
Working Paper, No. 9297. 
 
Grabel, Ilene, 2003. "Averting crisis:  Assessing measures to manage financial integration in 
emerging economies". Cambridge Journal of Economics, 27(3), pp. 317-36. 
 
IMF International Monetary Fund,  2000. Annual Report on Exchange Arrangements and 
Exchange Restrictions. Washington, D.C: 
 
Krugman, P., 1998. "Open letter to Mr. Mahathir", Fortune. September 28. 
 
Pollin, 1998, "Can Domestic Expansionary Policy Succeed in a Globally Integrated 
Environment? An Examination of Alternatives", in Dean Baker, Gerald Epstein and Robert 
Pollin, eds. Globalization and Progressive Economic Policy. New York: Cambridge University 
Press. 
 
Rodrik, Dani, 1998. "Who Needs Capital-Account Convertibility?", in "Should the IMF Pursue 
Capital-Account Convertibility", Princeton Essays in International Finance, No. 207, 55-65. 
 
Stiglitz, J., 2002. Globalization and Its Discontents, NY, W. W. Norton & Co.  
 

Annual Report on Exchange Arrangements and Exchange Restrictions.

Averting crisis: Assessing measures to manage financial integration in emerging economies&quot;.

Can Domestic Expansionary Policy Succeed in a Globally Integrated Environment? An Examination of Alternatives&quot;,

Capital Management Techniques In Developing Countries: An Assessment of Experiences from the 1990's and Lessons For the Future&quot;

Globalization and Its Discontents,

In Defense of Capital Controls&quot;. Socialist Register.

The Capital Myth: The Difference Between Trade in Widgets and Dollars,” Foreign Affairs.

Who Needs Capital-Account Convertibility?&quot;, in &quot;Should the IMF Pursue Capital-Account Convertibility&quot;,

Capital Management Techniques in Seven Developing Countries During the 1990s: Lessons for Policy Makers

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Capital Management Techniques in Seven Developing Countries During the 1990s: Lessons for Policy Makers

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