Should Capital Controls be Banished?

AT ITS SEMIANNUAL MEETING in April 1997 the Interim Committee of the International Monetary Fund (IMF) proposed that the organization's Articles of Agreement (the basic "constitution" of international financial relations among its 182 member countries) be amended to include currency convertibility for capital transactions among its fundamental objectives.Since the IMF was founded in 1946, currency convertibility for current transactions-goods, services, travel, interest, and dividend paymentsenshrined in Article VIII, has been not only a fundamental objective of the organization but a condition for membership in good standing.But convertibility for capital transactions was pointedly excluded from the basic objectives; indeed, early proposals would have enjoined member countries, when requested, to help other members enforce such controls on international capital transactions as they might impose, although that provision was ultimately not adopted.Private international capital movements were badly disrupted by the extensive debt defaults of the 1930s and the ravages of World War II.Since the 1940s, however, they have grown rapidly, regaining the importance in international transactions that they had before World War I and in the 1920s.The world of international economic intercourse is thus very different today from that envisaged by the architects of the IMF.Shortly after the Interim Committee's meeting, the Asian financial crises erupted.Some observers attributed these crises in part to unwise or excessive capital liberalization.Malaysia dramatically reimposed controls on outward capital movements in September 1998, while other countries tightened their existing controls.All these developments have made 89