CONTROLS ON CAPITAL OUTFLOWS : THE EXPERIENCES OF ASEAN COUNTRIES

Abstract

Structural reforms in the world has brought increasing integration of the financial markets between countries. Such integration has encouraged financial liberalisation which has involved the relaxation of capital controls and allowed easier cross-border transfer to take place. While most of the industrial countries have liberalised capital controls, many developing countries have continued to maintain restrictions over their capital accounts. Limiting excessive short term capital flows which would cause exchange rate volatility; the retention of domestic savings for domestic development; the maintenance of a tax base where revenue can be derived from; and providing support to stabilisation and structural reform programs are the reasons provided to justify the imposition of capital controls. The common types of controls engaged by nations are quantitative restrictions which require a license from the authorities in order to conduct capital transactions; a multiple exchange rate arrangement and taxes on external financial transactions. A general observation indicates that capital controls are implemented due to the fear of capital flight, which is why controls are usually aimed at controlling capital outflows and residents' capital transactions are more tightly restricted than non-residents'. A country that possess an underdeveloped and inefficient tax system; relatively few outside sources of revenue next to taxation; large government expenditures; a dependent Central Bank which allow the government to intervene in the implementation of monetary policy; a fixed or managed exchange rate system; huge current account deficits which requires the control over capital to prevent exchange losses; a close economy; a left wing government; a one party majority government; and political instability, possess the highest possibility in implementing capital controls. The ASEAN countries engaged quantitative restrictions as a form of capital control. In addition, Indonesia, Thailand and the Philippines had adopted a multiple exchange rate system at one point or another in the period when capital controls were imposed. Other than Thailand and the Philippines, the rest of ASEAN maintained a system of exchange controls which was in existence during the colonial times. While Indonesia, Malaysia and Singapore took a liberal stance in capital controls, the Philippines had the most complex system of exchange controls. Latest in accepting Article VIII sections 2,3 and 4 of the IMF Agreements, Thailand and the Philippines only began their liberalisation drive in the 1990s. In the post war era, these two countries had maintained restrictions on the capital accounts due to the depletion of their international reserves and the persistence of balance of payment deficits. Economic development which requires the support of a more sophisticated financial sector usually lead to financial liberalisation - including capital account liberalisation - in the ASEAN countries. For Singapore, establishing herself as a financial centre was the reason why controls were progressively relaxed. For Malaysia, liberalisation was linked to the economic development and is a natural evolution of the development process. Indonesia's over-regulated and mismanaged financial system has led to substantial economic woes. Thus, the liberalisation of the financial markets seek to rehabilitate the economy. Thailand and the Philippines experienced promising economic growth during the 1980s and 1990s respectively, which established a necessity for greater support from the financial system. The strength of their international reserves and the macroeconomic stability experienced in recent years has permitted these countries to embark on financial liberalisation as well.