Capital controls provide brief release from pain

PUBLISHED : Monday, 21 September, 1998, 12:00am
UPDATED : Monday, 21 September, 1998, 12:00am

A United Nations body that goes by the awkward acronym of Unctad (United Nations Conference on Trade and Development) has joined the chorus calling for the imposition of capital controls as a solution to the currency crises of developing countries.

One expects it from the UN, of course, and Unctad made the usual politically correct noises about rescue packages favouring the demands of creditors over the need of debtors and financial markets being more concerned with speculation than job creation.

But what all this growing support for capital controls does not address, at least in Asia, is why the need for them has arisen in the first place and just what they will achieve other than quick and short-term relief.

Take Malaysia. It was at one time classified as one of the world's biggest emerging markets and a beacon of investment opportunity.

It is now regarded as one of the world's small submerging markets and has slapped on the full list of government fetters - capital controls, currency controls, interest-rate controls, the works.

To hear Prime Minister Mahathir Mohamad describe it, Malaysia tried the free-enterprise route but it didn't work. Foreign speculators took advantage of the open borders to trash the economy.

Malaysia has learned its lesson and will now try a different path.

As Dr Mahathir sees it, Malaysia was at one time growing strongly, with prospects for ever continuing growth. Now surely, if this has fallen apart, the blame cannot be put on ordinary Malaysians who have worked as hard as ever only to see their hopes dashed. Why should foreigners have come in to wreck it? But as a medical doctor, the premier ought to know that there is a word in his profession for continued unrestrained growth. That word is cancer.

Here is a physician who can spot a fever in a human patient in all of four seconds but was looking at one in his economy for four years and did not see a thing. Yet his name for it was Vision 2020.

Towering over the capital city now are the twin spires of the Kuala Lumpur City Centre, the tallest building in the world if one disregards the claim that a pole stuck on the top of Sears Tower still retains that honour for Chicago. It is straight hubris funded by taxpayers who got no more than a warm feeling in return.

A national car, a national steel industry, a national shipping line, a huge new airport, a complete new city for the national government, a world centre of electronics research, new roads, glittering new office towers. The list goes on.

Malaysia wanted it all and if private money would not do it then call on the public purse.

Malaysia's problem is not that it tried free markets and they did not work. It is that it never really tried free markets at all. The government had its thumb in almost everything, and that thumb had its nerve connections cut so that it could not register pain where it did not fit.

Now it is no longer only the thumb that is affected. The damage has gone up the arm and has spread everywhere. If only Dr Mahathir were to stop acting as a shocked patient and take a doctor's perspective he might see it. But he has not done so yet.

He has taken the patient's remedy - give me a shot, doc, and stop it hurting.

It may admittedly be the best immediate remedy. Capital controls have been recommended for such occasions even by such economics luminaries as Paul Krugman.

But Mr Krugman is firmly of the view that such controls are first-aid measures only, and that further economic devastation could result if they are not removed as soon as possible.

Dr Mahathir does not appear to share this view, however, and most others who see capital controls as a solution, including Unctad, are similarly vague about what the controls will do and how long they must last.

The good doctor needs to consult his medical texts again. In a roundabout way, they offer better advice than he is being given by his other advisers at the moment.