There has been a low clamoring for capital control for a while now. The latest call was made by Member of Parliament Charles Santiago of DAP.[1] Regardless of the pros and cons of capital control, its imposition, if it is to be imposed, needs to be done relatively quickly without much warning. Slow imposition in form of heated debate among policymakers may reduce its effectiveness. Here is why.
Proponents of capital control fear hot money in a sense that when it is withdrawn, it would affect the local economy badly. While capital control is aimed typically at hot money, it also affects other flows that are more innocent in nature in the eyes of these proponents.
Liquidity is important. With the reduction of liquidity that what capital control causes, individuals, foreigners especially, will be less willing to bring in money into a country that imposes control. Those who already have money in a country where there is risk of capital control might want to take money out to preempt the control.
The greater the call for capital control, the greater the risk of actual implementation will be. Forward-looking owners of fund will do the necessary to reduce their risk of low liquidity. This means the impact of capital control can be as devastating as the impact of withdrawal of hot money under a system of no control. Money flows out either way. It is just a matter of when. That may make capital control as a tool as somewhat irrelevant.
Capital control can be relevant if the announcement and implementation are done in a sudden move. Sudden implementation preempts expectations build-up.
But there lies the catch-22. Talk about it and it becomes irrelevant. Not talk about it and there is no call for control, hence no control. For a secretive government that does not tolerate free speech however, this might not apply.
[1] — KUALA LUMPUR, Nov 23 — A DAP MP wants Putrajaya to impose capital controls like that which former prime minister Tun Dr Mahathir Mohamad enacted in 1997 to prevent what he called an impending surge of hot money into the local market would put Malaysia into a tailspin similar to the Asian Financial Crisis.
Klang MP Charles Santiago explained that this time the hot money would come from the US Federal Reserve’s move to spend a whopping US$600 million (RM1.8 trillion) to purchase US Treasuries over the next eight months under its quantitative easing programme. [DAP MP wants Malaysia to impose capital controls. Clara Chooi. The Malaysian Insider. November 23 2010]