The Asian Development Bank, the International Monetary Fund and the United Nations are in broad agreement: capital controls are legitimate tools for governments facing investment inflows that threaten to unsettle their economies. But countries that actually impose them know better than anyone that they may not actually work.
Take Thailand. Bangkok’s last attempt to throw sand in the wheels of international finance, in December 2006, was famously bungled. The decision to require 30 per cent of all inflows to be deposited with the central bank for a year, without interest, was reversed a day later for equities after the local stock market benchmark saw the biggest one-day drop in its history. But what is often forgotten was that the controls had little if any effect on the currency. The baht continued to grind higher against the dollar, reaching a post-1997 high in March 2008. It was only in May that year – three months after the controls came off – that the baht embarked on a steady weakening trend.
The latest measures are more modest: a removal of the tax breaks received by foreign investors in domestic bonds. But the basic aim is the same: to tame Asia’s second-strongest currency this year, up 11 per cent against the dollar. Finance minister Korn Chatikavanij seems to recognise, though, that with a trade surplus, a current account surplus, and economic growth at a 15-year high, upward pressures will be hard to contain. Widening interest rate differentials with developed economies will only encourage speculative flows. And not all the inbound capital is “hot”: foreign direct investment approvals from Europe, for example, were up fivefold between January and August. There is some value in signalling to foreign investors that currency appreciation won’t be entirely unchecked. But fundamentally, resistance may be futile.