Should We Still Support Untrammelled International Capital Mobility? Or are Capital Controls Less Evil than We Once Believed?

J. Bradford DeLong, The economists' voice(2004) Berkeley electronic press

Fifteen years ago, I found it easy to be in favor of international capital mobility — the free flow of investment financing from one country to another. Then, it was easy to preach for an end to the systems of controls on capital that hindered this flow.

"Why not free up capital flows, to encourage large-scale lending from the world's rich countries to the world's poor countries?" I, and others, asked. Such lending, we hoped, might cut a generation off the time it would otherwise have taken developing countries' economies to catch up to the industrial structures and living standards of wealthier countries.

More than a century ago, large-scale borrowing and lending had played a key role in the economic development of the late-nineteenth century temperate periphery of Canada, the western United States, Australia, New Zealand, Chile,Argentina, Uruguay, and South Africa. Why shouldn't it similarly benefit twentieth century developing countries?

This reasoning seemed compelling then. Today, however, it is much harder for me to support untrammelled international capital mobility. I am no longer as sure that capital flows are efficient. Too many external costs associated with financial crises, and the fact that capital seems to want to flow not from, but to, where it is already abundant, make me fear that my standard economist’s model is simply not working.

Worse yet, even if capital flows are efficient, it seems increasingly likely that these flows could benefit rich people from poor countries at the expense of the countries themselves — including their poor. Thus, lifting capital controls—far from helping the world's poor, as many had hoped — may actually hurt them. ...
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