INTRODUCTION

In the 1990s, net capital inflows to developing countries grew substantially, particularly to those countries that had liberalized their capital accounts. As countries experienced surges in capital flows, the debate on how to manage these surges became a pressing policy topic. Capital controls, when they were discussed at all, were examined in the context of liberalizing restrictions on capital outflows, or in terms of which types of capital inflows should be taxed. However, with the most recent wave of financial market turbulence there has been a shift in the debate on capital controls. The types of controls that were contemplated or used during the recent crises were very different from the measures introduced during the inflow phase of the capital flow cycle (see Reinhart and Smith, 1998). These types of controls are applied mainly to outflows and are viewed as “last resort” measures as opposed to controls being applied to inflows which were interpreted as “prudential.”

Controls on capital outflows have been advocated as a way of dealing with financial and currency crises. These controls can take a number of forms: restrictions on capital account transactions including taxes on funds remitted abroad, outright prohibition of funds' transfers, dual exchange rates, and outright prohibition of cross-border movement of funds. The idea behind these measures is that they help slow down the drainage of international reserves and capital outflows and give the authorities time to implement corrective policies.