Capital Controls

The free flow of money across national borders: That’s the soul of the modern global economy. It puts capital where it’s most useful, maximizing prosperity. What’s not to like? The disastrous busts that can come after giddy booms. To fight back, countries put restrictions in place either to stop too much money from flowing in during good times or to keep capital from leaking out during a crisis. From 1995 to 2010, 37 countries blocked the outflow of money. Sometimes it seemed to work, sometimes not. It’s hard to control the flow of capital without scaring away foreign investors. In 2015, doubts about Greece’s future in the euro triggered a record flight of bank deposits, forcing the government to shut down the financial system to stave off a collapse. No wonder capital controls retain their appeal.

Greece closed its banks and stock exchange in June, limited cash withdrawals and halted most transfers abroad after a breakdown of rescue talks with international creditors triggered long lines at ATMs. The country surrendered to European demands two weeks later, after crisis-weary citizens had stocked up on food and milk powder and pharmacies began to run out of medicines. Only then could it begin to lift restrictions. Cyprus took similar steps in 2013, when it became the first country in the euro area to impose capital controls during a banking crisis. Other countries put controls in place in 2014, including Ukraine, which imposed curbs on purchases of foreign currencies as its conflict with Russia expanded. Countries rolling back limits included Argentina and Venezuela, where a currency crunch caused shortages of food and drugs and fueled the world’s fastest inflation. Iceland took steps in December 2014 to unwind six-year-old restrictions on the krona. In China, the government is starting to relax controls that have anchored the economy for three decades, though its move to prop up the stock market in mid-2015 tarnished the idea that it’s ready to embrace free markets.