On Malaysian capital control

economics ▪ finance ▪ quotes ▪

From Frederic Mishkin's new book on financial globalization, a commentary on the efficacy of the Malaysian capital control to fend off the Asian crisis:

Paul Krugman, Dani Rodrik, and Joseph Stiglitz have taken the position that Malaysia performed better than other East Asian countries after the crisis, suggesting that Malaysia's capital controls did help lessen the severity of the crisis. I take a different position, one that I believe is more consistent with the facts. That Malaysia was in a far better position than other East Asian countries at the onset of its troubles explains why its crisis was less severe. Before the crisis, Malaysia had a smaller lending boom and a smaller problem with nonperforming loans because its central bank did a much better job of supervising the banking system than did the central banks in other crisis countries. Instead, it was the anti-market policies and statements of the Mahathir government that caused the Malaysian crisis to be as severe as it was. The primary impact of the Malaysian capital controls was to give the government greater scope to assist politically connected firms and to engage in cronyism. The fact that politically connected firms saw a relative rise in their stock market value when the capital controls were imposed supports the negative impact of these controls.

Sounds about right to me ― especially the latter part!

By the way, Mishkin's book gives a compelling case for accelerating (the right kind of) financial liberalization in developing countries. Definitely worth reading for developing country economists and policymakers alike.