The imposing of constraints on capital flows in emerging economies: An emerging economy study

The purpose of this paper is to review the practicality and implications of capital controls in emerging economies in the international financial landscape subsequent to the 1997 Asian financial crisis (AFC) and the 2008 global financial crisis (GFC).

The doctrinal approach used in this study relies primarily on primary data from relevant statutes and regulations in the capital and financial markets, and secondary data from research findings of published sources available in the public domain. It also makes concurrent use of the case study approach.

The disdain over the use of capital controls by emerging economies such as Malaysia in the 1997 AFC by multilateral agencies like the International Monetary Fund (IMF) since then and particularly after the 2008 GFC and the 2011/2012 European financial crisis (EFC) has been quietly and gradually transformed into a viable policy option under defined circumstances, especially at the IMF and global forums like the G20. The 1997 AFC in particular induced East Asian economies and others to strengthen the macroeconomic and financial positions, such that they were not only able to withstand the impacts of the 2008 GFC and the 2011/2012 EFC but also contributed to their gradual recoveries through their participation as net lenders to the IMF. The enhanced confidence of these emerging economies to use various capital controls without seeking IMF support spawned new thinking at the IMF to result in the introduction of policy guidelines sanctioning the use of capital controls under particular circumstances.

The paper is constrained by the usual limitations connected with qualitative studies, but this is generally mitigated by triangulation of perspectives and so on.

This paper provides a critical overview of the pros and cons of capital controls. In particular, it analyses the implications of capital controls as a policy option for emerging economies when facing severe financial crisis. It also critically discusses how and why flowing from the aftermath of its application by Malaysia in the 1997 AFC and subsequent employment by other successful emerging economies in response to the 2008 GFC and 2011/2012 EFC, multilateral institutions such as the IMF and international forum like the G20 developed a more positive approach toward the use of capital controls.