Did the Malaysian Capital Controls Work?

Citation

Rodrik, Dani, and Ethan Kaplan. "Did the Malaysian Capital Controls Work?" KSG Faculty Research Working Papers Series RWP01-008, February 2001.

https://www.hks.harvard.edu/publications/did-malaysian-capital-controls-work#citation

Abstract

Malaysia recovered from the Asian financial crisis swiftly after the imposition of capital controls in September 1998. The fact that Korea and Thailand recovered in parallel has been interpreted as suggesting that capital controls did not play a significant role in facilitating Malaysia's rebound. However, the financial crisis was deepening in Malaysia in the summer of 1998, while it had significantly eased up in Korea and Thailand. We employ a time-shifted differences-in-differences technique to exploit the differences in the timing of the crises. Compared to IMF programs, we find that the Malaysian policies produced faster economic recovery, smaller declines in employment and real wages, and more rapid turnaround in the stock market.

https://www.reuters.com/article/us-malaysia-controls-idUSKLR907820070320
[size=35]FACTBOX: Malaysia after capital controls[/size]


(Reuters) - Malaysia steered its own course through the 1997-98 Asian financial crisis, imposing temporary capital controls and fixing the ringgit’s exchange rate.

The government and some academics credit these unorthodox measures with helping Malaysia weather the storm better than some of its neighbors, but questions remain over the long-term costs of this strategy in terms of the confidence of foreign investors.

Here are the key facts: DOES MALAYSIA HAVE CAPITALCONTROLS?

- Malaysia says it scrapped its controls many years ago, but the ringgit is still not allowed to be traded offshore.

WHAT WERE THE ORIGINAL CAPITAL CONTROLS?
- On September 1, 1998 Malaysia enforced capital controls to shield its economy from currency speculators in the wake of the Asian financial crisis.

- Malaysia pegged the ringgit at 3.8 per U.S. dollar and curbed import and export of the currency. Other Southeast Asian economies followed the International Monetary Fund’s advice, raising interest rates to stabilize their currencies.

- Short-term ringgit assets, like cash and shares, were quarantined into specially created “external” ringgit accounts, and relatively new investors were prevented from converting them into foreign currency for repatriation for at least 12 months.

- This effectively froze ringgit assets held offshore. In February 1999, Malaysia replaced the 12-month ban with a system of taxes on repatriation of principal investments. This was done to avoid a sudden and huge outflow of capital. This system of taxes was later abolished.

- Some economists say the controls helped Malaysia to recover more swiftly from the financial crisis than neighbors Indonesia and Thailand.

- But others say they took a toll on the economy and stock market, and that the ringgit remains an undesirable currency for some foreign investors. Malaysia's weighting in the MSCI Asia ex-Japan stock index .CIAX has fallen to 4.37 percent last month from 20.67 percent in February 1996.

RELAXING CONTROLS:
- Malaysia freed the ringgit MYR= from its seven-year-old dollar peg in favor of a managed float in July 2005.

- The central bank says it has a hands-off approach toward the currency, but economists and dealers say the authorities have still kept a grip on the ringgit to protect local exporters.

- Funds in an external account can be converted into foreign currency with the licensed onshore banks and repatriated at any time.

RESTRICTIONS ON NON-RESIDENTS:
- Non-residents need prior permission from the central bank for financing the purchase of land only.

- Non-residents may lend in ringgit to residents who have obtained the prior permission of the central bank.

- Non-residents are not allowed to lend in ringgit to other non-residents.

- Non-resident travelers may not bring in or out of Malaysia over 1,000 Malaysian ringgit in cash (currently worth $285) and must declare foreign currency notes exceeding US$10,000.

RESTRICTIONS ON RESIDENTS:
- A resident traveler may import or export up to 1,000 ringgit in notes and export foreign currency notes up to the equivalent of US$10,000.

- Permission is needed to carry ringgit notes exceeding 1,000 ringgit into or out of Malaysia and to carry out foreign currency notes exceeding the equivalent of US$10,000.

- Residents may pay a non-resident for the import of goods and services in any foreign currency except Israeli currency, as Malaysia does not recognize the state.

Sources: Reuters, Bank Negara (www.bnm.gov.my)