On The Capital Account Liberalization And Capital Controls In Malaysia And Its Implications

The capital account liberalization of Malaysia was not plain sailing. The liberalization process was speeded up during the 1970s and 1980s. However, several potential macroeconomic and financial risks was partially caused by and coexisted with the liberalization process. After entering into 1990s, the Malaysian government has imposed capital control twice. The control of capital inflows in 1994 was temporarily successful in preventing excess capital inflows and eliminating economic bubbles, but failed to improve the structure of capital flows. Therefore, when Malaysia was under speculative attacks during the Asian Financial Crisis, the risks were exposed and caused massive evacuation of foreign capital as well as abnormal fluctuation of exchange rates. In order to prevent the economy from long-term turbulence and declination, the Malaysian government decided to impose control on capital outflows and to fix exchange rate of Ringgit to US Dollar. By taking these measures, the government managed to recover the monetary autonomy, to use monetary policies to stimulate the economy while to gain time for the financial reform. However, the capital control also led to lack of confidence among investors and drops in stock markets, which might delay the economic recovery at some level. When the capital account was reopened after the crisis, the risks of international capital flows still existed. It is the economic and financial reform during the capital control period that helped the financial and private sectors to be equipped with capabilities to withstand the risks, thus prevented the recurrence of financial crisis.From the experience and lessons of Malaysia and other developing countries, we find that the capital account liberalization is inevitable for China. However, several preconditions are required, such as economic strength, sufficient exchange reserves, acceleration of ongoing economic and financial structural reform, as well as establishment of effective financial supervision and security mechanism. At the same time, the capital account liberalization in China is a long-term dynamic process. We have to advance the capital account liberalization gradually and prudently, especially give full consideration to risk control as well as coordination of policy objectives. q...