DeLong on Capital Controls

by Don Boudreaux on September 27, 2004

in Regulation

Brad DeLong’s essay in the inaugural issue of The Economist’s Voice is worth reading. It’s written clearly and concisely. But ultimately it misses the point.

His thesis is that the loosening, over the past twenty years, of controls on international capital flows has encouraged capital to flow out of, rather than into, poor countries. Americans and Brits benefit from freer capital movements; Mexicans and Nigerians do not.

DeLong admits that the principal reason for this direction of flow is that investments in poor countries are too uncertain relative to investments in rich countries. Your factory in Chad is much more likely to be held hostage by corrupt bureaucrats and foolish politicians than is your factory in Charleston.

So, DeLong worries that the loosening of capital controls is making rich nations richer (along with the tiny handful of rich investors living in poor nations who can buy debt and equity in rich countries) and poor nations poorer.

What’s unclear about DeLong’s thesis is just how capital controls – even ones not accompanied by the corruption that DeLong understands is practically unavoidable – would help poor countries. It isn’t as if the $90 billion or so of investment flowing into America today from the third world would all be invested in third-world nations if investors there could no longer get their capital out of their poor countries.

The world’s supply of capital is not fixed. If governments (1) make it impossible for poor-country investors to invest in rich countries, and (2) make it more costly for investors in poor-country enterprises from liquidating those investments and moving their capital to wealthier countries, the result will be less investment worldwide. Much (almost all, probably) of the funds invested by poor-country investors in rich countries will simply stop being investment funds. Capital controls will not inspire these funds to erect factories in Russia and to improve farmland in Zimbabwe. Most of the investments that capital-controls prevent from happening in the U.S. and western Europe will simply disappear, not to reappear anywhere else on the globe.

DeLong recognizes this fact when, toward the end of his essay, he speaks of income equality. It’s certainly true that freer capital flows might make incomes worldwide more unequal – but only by encouraging further wealth-creation in free, rich countries, not by taking wealth from poor countries.

The freer is capital to flow internationally, the better able it is to proclaim which countries are free and which are not.
….
One nice feature of DeLong’s essay is that it refuses to lend a smidgen of credence to the common, pop belief that current-account deficits (that is, capital-account surpluses) are bad.

Be Sociable, Share!

Comments

comments

Add a Comment    Share Share    Print    Email

Previous post:

Next post: