Sunday, July 30, 2006
Capital controls impeding economic growth
A familiar theme in the research literature when thinking about either trade barriers or capital controls has been that they adversely impact upon productivity. As an example, see the paper by Kristin Forbes titled The Microeconomic Evidence on Capital Controls: No Free Lunch from a forthcoming NBER book. I saw a ground level story of that nature today in this story: Nokia, Sony, Ericsson found guilty of foreign exchange violation which talks about how Nokia, Sony and Ericsson were among 11 firms whose Indian operations were found guilty of violating foreign exchange regulation by an appellete tribunal. I, of course, know nothing about the specifics of the case. But I don't think Nokia, Sony and Ericsson are firms with a weak compliance culture. It is perhaps more likely that the everyday conduct of business in the modern world of international trade is incompatible with traditional notions of capital controls. The rules, inspectors and penalties that India imposes in these matters are a piece of control raj that adversely impacts upon productivity.