It is astonishing how quickly times can change. A country like Brazil, long dependent on foreign capital injections, introduces measures to prevent excessive inflow of capital. It seems quite counter-intuitive that countries would hinder investment. The question is why are countries such as Brazil and potentially other Asian economies doing it?
An obvious reason is that they fear that the cheap money creates uncontrollable asset bubbles and triggers yet another crisis. The Federal Reserve has been upholding its historically loose monetary policy for an extended period of time and has shown no intent to stop any time soon. Lots of American investors seem to realize that the U.S. economy is not recovering quickly let alone strongly. Hence, they look elsewhere for growth opportunities. This is so far a normal economic allocation process but the past (or should I say current) financial crisis has added another layer to the situation. Emerging economies have painfully experienced how quickly foreign money can be withdrawn. Higher growth prospects are luring investors into emerging markets. However, once risk aversion increases owing to a looming crisis most investors flee back into the dollar. Such a sudden capital withdrawal leaves a country quite helpless, in particular if a domestic crisis has already started to unfold. Capital flight makes it often all but inevitable that the affected country has to ask for foreign assistance. Aid comes mostly in forms of IMF money, but is always attached to some form of interference with a state’s sovereignty.
In general, I believe that the number of economic problems in a capitalist economy is limited and the same problems occur again and again. The exact circumstances and the severity of the problem might not be the same, but in principal the world has seen capital controls before in order to fight certain economic woes. In addition, it seems that if a certain area is “over-liberalized” as I may call it, politicians that usually are eager to do something, re-discover such a field and start re-regulating. Capital controls have been virtually non-existent in most parts of the globalized world. It seems to be destined to change in the future.
What are possible consequences? It seems quite unlikely that capital controls can prevent the influx of money effectively enough. As a result, economies that are picking up speed partly lose their ability to slow down the economy through limiting credit supply. Almost inevitably, this will create asset bubbles of some sort. However, it is quite difficult to predict when and how quickly bubbles burst. Contrary to popular believe there have been many economists warning of the recent credit crisis. The timing and the exact unfolding of events was almost impossible to foresee. Personally, I feel it is not very likely that any of those asset markets is in danger to collapse in the near future. Cheap money will be available for quite some time and officials of potential candidates such as Brazil or China (the real estate market in Hong Kong seems to be increasingly running hot) seem wary of the situation. Usually it requires a lot more blind optimism for markets to turn. Cheap dollar supply is clearly an interesting issue that might occupy market participants for some time to come. It does not, however, pose an immediate threat to asset markets in emerging markets.
