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The removal of capital controls was an important contributing factor to the 1997 currency crisis and its reinstatement was an important part of its remedy (for those countries that dared to reinstate them temporarily, such as Malaysia did with Krugman's blessing). It is apparent that free movement of capital contributes to financial instability generally.

Free movement of capital also renders international trade "non-Ricardian". In the presence of mobile capital trade is no longer win-win and comparative advantage is replaced by absolute advantage.

Capital controls need to be in the form of hard barriers, but simply of exit taxes.

I wonder if what is really damaging is the combination of free movement of capital and freely floating currency exchange rates. You could have one or the other. I think exit taxes on capital are by far the easiest way to moderate things.

In five words, capital controls are not 'protectionism'.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Carrie (migeru at eurotrib dot com) on Tue Jan 13th, 2009 at 05:05:10 AM EST

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