Monday, 12 March 2007

Research Papers: Collateral Damage: Exchange Controls and International Trade

In development economics the issue of capital controls is always a cause of much argument. The IMF programmes in Latin America (Argentina) and the IMF prescriptions following the Asian crisis have come under much criticism not least from Joesph Stiglitz in his book Globalization and Its Discontents. There are also numerous example where capital controls have been seen to work e.g. in Malaysia after the 1997 Asian Crisis.

This new research paper from SHANG-JIN WEI at the IMF looks at the use of capital controls from a trade perspective. I have not yet read the paper but the results are plausible and provides more ammunition for the supporters of globalisation.

Given China's current position the results of this paper should be considered in light of current and possible future policies.


"Collateral Damage: Exchange Controls and International Trade"
IMF Working Paper No. 07/8

International Monetary Fund (IMF) - Research
Department, Centre for Economic Policy Research
(CEPR), National Bureau of Economic Research
(NBER), The Brookings Institution

Full Text:
ABSTRACT: While new conventional wisdom warns that developing
countries should be aware of the risks of premature capital
account liberalization, the costs of not removing exchange
controls have received much less attention. This paper
investigates the negative effects of exchange controls on trade.
To minimize evasion of controls, countries often intensify
inspections at the border and increase documentation
requirements. Thus, the cost of conducting trade rises. The paper
finds that a one standard-deviation increase in the controls on
trade payment has the same negative effect on trade as an
increase in tariff by about 14 percentage points. A one
standard-deviation increase in the controls on FX transactions
reduces trade by the same amount as a rise in tariff by 11
percentage points. Therefore, the collateral damage in terms of
foregone trade is sizable.

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