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Document 1892496
The Impact of Foreign Exchange Controls on the Economic Performance of
Emerging Economies and South Africa in Particular
Thulani Sithole
27528872
A research project submitted to the Gordon Institute of Business Science,
University of Pretoria, in partial fulfilment of the requirements for the degree of
Master of Business Administration.
November 2008
© University of Pretoria
ABSTRACT
Capital controls relaxation is one critical macroeconomic policy
component that constitutes the broader framework of economic reform
policies.
Research work has been done, especially on developed
countries, to establish if relaxation of capital controls does improve
economic performance of a country. The literature reviewed supports this
notion but the results from causal studies lack consistency, especially when
studying the emerging economies.
This research reviewed the literature on the impact of capital account
liberalization and the pace thereof on economic growth of emerging
economies. Then, a quantitative research methodology was followed
whereby 67 emerging economies, geographically grouped into five
continents, were studied over a period of 25 years, 1980 to 2005. The
economic growth rate was traced as the emerging economies relaxed or
tightened their capital controls to establish if there was any kind of
relationship.
It was statistically proven that in emerging economies
relaxation of capital controls had a significantly low impact on economic
growth and that a gradual relaxation approach positively impacted
economic performance.
1
DECLARATION
I declare that this research project is my own work. It is submitted in partial
fulfilment of the requirements for the degree of Master of Business
Administration at the Gordon Institute of Business Science, University of
Pretoria. It has not been submitted before for any degree or examination in
any other university. I further declare that I have obtained the necessary
authorization and consent to carry out this research.
Name: Thulani Innocent Sithole
Date: 13 November 2008
2
ACKNOWLEDGEMENTS
I would like to make the following acknowledgements of individuals who
inspired and supported me through the MBA and research project.
ƒ
Andile Sithole, my wife, for being supportive, caring and patient
during the challenging times.
ƒ
Spesihle and Mangaliso, my children, for the inspiration.
ƒ
Mike Holland, my supervisor, for being supportive, understanding
and providing me with clear direction.
ƒ
Ilze du Plooy, my statistician, for her relentless efforts to make this
study a successful one.
ƒ
Leanne Kinghorn, who edited this report and made it look good.
ƒ
The staff of GIBS Information Centre for assisting me in obtaining
literature for the research.
ƒ
My fellow students who assisted me in a number of ways
throughout the MBA.
ƒ The Director, Prof. Nick Binedell, and the staff of GIBS who have
made the last two years a fulfilling and excellent learning
experience.
3
TABLE OF CONTENTS
ABSTRACT ......................................................................................................................................... 1 DECLARATION ................................................................................................................................ 2 ACKNOWLEDGEMENTS ............................................................................................................... 3 TABLE OF CONTENTS .................................................................................................................... 4 TABLE OF FIGURES ......................................................................................................................... 8 1. INTRODUCTION TO THE RESEARCH PROBLEM ...................................................... 10 1.1. RESEARCH PROBLEM ........................................................................................................ 10 1.1.1. WHY RELAX CAPITAL CONTROLS? ...................................................................... 10 1.1.2. WHY GRADUAL APPROACH? ................................................................................ 14 1.1.3. CONCLUSION .............................................................................................................. 16 1.2. RESEARCH OBJECTIVES ................................................................................................... 17 1.3. IS THERE A NEED FOR THIS RESEARCH? ..................................................................... 18 1.4. WHY SOUTH AFRICA IN PARTICULAR? ...................................................................... 21 2. LITERATURE REVIEW ........................................................................................................... 22 2.1. BALANCE OF PAYMENTS AND FOREIGN EXCHANGE CONTROLS ................. 22 2.2. ECONOMIC GROWTH ..................................................................................................... 25 2.3. ECONOMIC FREEDOM .................................................................................................... 26 2.4. EMERGING ECONOMIES ................................................................................................ 28 2.5. CAPITAL ACCOUNT LIBERALIZATION......................................................................... 30 2.6. CAPITAL ACCOUNT LIBERALIZATION IN EMERGING ECONOMIES ................ 31 4
2.7. SOUTH AFRICA’S FOREIGN EXCHANGE CONTROLS ........................................... 33 2.8. OTHER RESEARCH STUDIES ............................................................................................. 40 2.8.1. ECONOMIC FREEDOM INDICATORS EMPLOYED ........................................... 41 2.8.2. RESEARCH OUTCOMES ............................................................................................ 42 2.8.3. CONCLUSION .............................................................................................................. 44 3. RESEARCH PROPOSITIONS ............................................................................................. 45 3.1. PROPOSITION 1 .................................................................................................................. 45 3.2. PROPOSITION 2 .................................................................................................................. 45 4. RESEARCH METHODOLOGY .......................................................................................... 47 4.1. POPULATION ....................................................................................................................... 50 4.2. SIZE OF THE SAMPLE ......................................................................................................... 52 4.3. PROCESS OF DATA ANALYSIS ...................................................................................... 54 4.4. DEFENDING THE METHODOLOGY ............................................................................... 55 4.5. LIMITATIONS OF THE RESEARCH .................................................................................. 56 5. RESULTS .................................................................................................................................. 58 5.1. IMPACT OF RELAXATION OF CAPITAL CONTROLS ON ECONOMIC GROWTH
.................................................................................................................................................. 58 5.1.1. AFRICA ........................................................................................................................... 59 5.1.1.1. MEDIAN GRAPH ...................................................................................................... 59 5.1.1.2. CORRELATION STUDY ........................................................................................... 60 5.1.2. AMERICA ....................................................................................................................... 61 5.1.2.1. MEDIAN GRAPH ...................................................................................................... 61 5
5.1.2.2. CORRELATION STUDY ........................................................................................... 62 5.1.3. ASIA ................................................................................................................................. 63 5.1.3.1. MEDIAN GRAPH ...................................................................................................... 63 5.1.3.2. CORRELATION STUDY ........................................................................................... 64 5.1.4. ALL EMERGING ECONOMIES ................................................................................ 65 5.1.4.1. MEDIAN GRAPH ...................................................................................................... 65 5.1.4.2. CORRELATION STUDY ........................................................................................... 66 5.1.5. SOUTH AFRICA ............................................................................................................ 67 5.1.5.1. ECONOMIC FREEDOM AND ECONOMIC GROWTH ................................ 67 5.1.5.2. CORRELATION STUDY ........................................................................................... 68 5.2. IMPACT OF PACE OF RELAXATION OF CAPITAL CONTROLS ON ECONOMIC
GROWTH ............................................................................................................................... 69 5.2.1. AFRICA ........................................................................................................................... 69 5.2.1.1. MEDIAN GRAPH ...................................................................................................... 69 5.2.1.2. CORRELATION STUDY ........................................................................................... 70 5.2.2. AMERICA ....................................................................................................................... 72 5.2.2.1. MEDIAN GRAPH ...................................................................................................... 72 5.2.2.2. CORRELATION STUDY ........................................................................................... 73 5.2.3. ASIA ................................................................................................................................. 74 5.2.3.1. MEDIAN GRAPH ...................................................................................................... 74 5.2.3.2. CORRELATION STUDY ........................................................................................... 75 6
5.2.4. ALL EMERGING ECONOMIES ................................................................................ 76 5.2.4.1. MEDIAN GRAPH ...................................................................................................... 76 5.2.4.2. CORRELATION STUDY ........................................................................................... 77 5.2.5. SOUTH AFRICA ............................................................................................................ 78 5.2.5.1. MEDIAN GRAPH ...................................................................................................... 78 5.2.5.2. CORRELATION STUDY ........................................................................................... 79 6. DISCUSISION OF RESULTS ............................................................................................... 80 6.1. RELAXATION OF CAPITAL CONTROLS INCREASES THE GDP IN THE EMERGING
ECONOMIES ........................................................................................................................ 80 6.1.1. AFRICA ........................................................................................................................... 80 6.1.2. AMERICA ....................................................................................................................... 83 6.1.3. ASIA ................................................................................................................................. 84 6.1.4. ALL EMERGING ECONOMIES ................................................................................ 85 6.1.5. SOUTH AFRICA ............................................................................................................ 87 6.2. IMPACT OF PACE OF RELAXATION OF CAPITAL CONTROLS ON ECONOMIC
GROWTH ............................................................................................................................... 88 7. CONCLUSIONS ................................................................................................................... 94 7.1. BACKGROUND ................................................................................................................... 94 7.2. FINDINGS .............................................................................................................................. 95 7.3. SUMMARY ............................................................................................................................ 97 7.4. RECOMMENDATIONS ...................................................................................................... 98 7
7.5. FUTURE RESEARCH IDEAS ................................................................................................ 99 REFERENCES ............................................................................................................................... 101 APPENDICES .................................................................................................................................... 0 TABLE OF FIGURES
Figure 1: Capital inflows to emerging economies ........................................... 19 Figure 2: FDI to emerging economies ............................................................... 24 Figure 3: Impact of exchange controls on economic growth (Africa case) 59 Figure 4: Impact of exchange controls on economic growth (America) ..... 61 Figure 5: Impact of foreign exchange controls on economic growth (Asia) 63 Figure 6: Impact of exchange controls on economic growth (All emerging
economies) ......................................................................................................... 65 Figure 7: Impact of exchange controls on economic growth (South Africa)67 Figure 8: Impact of the pace of eliminating exchange controls on economic
growth (Africa) .................................................................................................... 70 Figure 9: Impact of the pace of eliminating exchange controls on economic
growth (America)................................................................................................ 72 Figure 10: Impact of the pace of eliminating exchange controls on economic
growth (Asia) ....................................................................................................... 74 Figure 11: Impact of eliminating exchange controls on economic growth (All
emerging economies)........................................................................................ 76 8
Figure 12: Impact of the pace of eliminating exchange controls on economic
growth (South Africa) .......................................................................................... 78 TABLE OF TABLES
Table 1: Emerging economies ........................................................................... 53 Table 2: Correlation study for Africa.................................................................. 60 Table 3: Correlation study for America ............................................................. 62 Table 4: Correlation study for Asia .................................................................... 64 Table 5: Correlation study for all emerging economies .................................. 66 Table 6: Correlation study for South Africa ....................................................... 68 Table 7: Correlation study (Pace of eliminating exchange controls in Africa)70 Table 8: Correlation study (Pace of eliminating exchange controls in America)
.............................................................................................................................. 73 Table 9: Correlation study (Pace of eliminating exchange controls in Asia) 75 Table 10: Correlation study (Pace of eliminating exchange controls in all emerging
economies) ......................................................................................................... 77 Table 11: Correlation study (Pace of eliminating exchange controls in South Africa)
.............................................................................................................................. 79 9
1. INTRODUCTION TO THE RESEARCH PROBLEM
1.1.
RESEARCH PROBLEM
The irresistible forces of globalisation have resulted in an increased
integration of markets across political and geographical boundaries, and
falling of government-imposed barriers to international flows of goods,
services, and capital. It has affected all countries with different economic
sizes and structures, developed and developing countries.
Globalization affects economic growth in different countries differently.
International financial arrangements which increase risk, and force the
developing countries to bear risk, increase the incomes of those countries
which have a comparative advantage in absorbing risk (the developed
countries) at the expense of those who have that comparative
disadvantage (the developing countries) (Stiglitz, 2003).
1.1.1.
WHY RELAX CAPITAL CONTROLS?
Takacs (1990) suggests that as part of protection from these international
financial arrangements (which are of capitalist nature in origin), developing
10
countries should rely on exchange controls to control their balance of
payments and to protect domestic industries.
According to Asiedu and Lien (2004), capital controls represent a country’s
attempt to shield itself from risks associated with fluctuations in international
capital flows. The other reason could be that in a country with a fragile
banking system, for instance, allowing households to invest abroad freely
could precipitate an exodus of domestic savings and jeopardize the
banking system’s viability. And short-term capital inflows can be quickly
reversed when a country is hit with an adverse macroeconomic shock,
thereby amplifying its macroeconomic effect. Some developing countries
also use capital controls to steer the composition of inflows toward more
stable forms, such as foreign direct investment (FDI).
Unlike Asiedu and Lien (2004), Kose and Prasad (2004) argue that access to
capital markets should allow countries to “insure” themselves to some
extent against fluctuations in their national incomes, such that national
consumption levels are relatively less volatile. Since good and bad times
are not synchronized across countries, capital flows can, to some extent,
offset volatility in countries’ own national incomes.
11
However, these restrictions distort trade and domestic resource allocation
and limit a country's ability to respond to changing conditions (Takacs,
1990).
The literature from macroeconomics studies suggests that the relaxing of
foreign exchange controls improves countries’ economic growth.
Angermann (2005) supports this view by stating that a country is dependent
on new capital coming in from abroad and is generally likely to benefit
from deregulation methods.
In economic theory, capital account liberalization should allow for more
efficient global allocation of capital, from capital-rich industrial countries
to capital-poor developing economies.
This should have widespread
benefits, by providing a higher rate of return on people’s savings in industrial
countries and by increasing growth, employment opportunities, and living
standards in developing countries.
According to Kose and Prasad (2004), capital account liberalization may
also be interpreted as signalling a country’s commitment to good
economic policies.
For a country with an open capital account, a
perceived deterioration in its policy environment could be punished by
12
domestic and foreign investors, who could suddenly take capital out of the
country. Inflows stemming from liberalization should also facilitate the
transfer of foreign technological and managerial know-how and
encourage competition and financial development, thereby promoting
economic growth.
Yusuf (1999) warns developing economies that before relaxing capital
controls it is important to remember the lessons learnt from the Asian
financial crisis, which inflicted large human and financial costs. The most
important is that gaps in the institutional infrastructure make financial
systems extremely fragile.
Many developing countries also lack an
institutional framework conducive to foreign direct investment, and
therefore lose out on the many benefits such flows could provide.
Ghosh, Goretti, Joshi, Ramakrishnan, Thomas and Zalduendo (2008) further
state that while capital inflows are generally beneficial to recipient
countries, they can also complicate macroeconomic management by
overheating the economy, deteriorating the external balance, and
increasing a country’s vulnerability to a change in market sentiment.
Despite the 1997 turmoil in financial markets, many emerging economies
continue to face positive capital flows and balance of payments pressures.
13
The consequences and desirability of capital account liberalization among
developing countries is likely to remain a topic of debate for the
foreseeable future. People on one side of this debate will maintain those
countries that open up to financial flows will set the stage for more rapid
development.
Those on the other side will question the advantages
actually conferred by capital account liberalization and, furthermore, will
argue that countries become more vulnerable to financial disruptions not of
their own making when their governments relinquish control over the inflow
and outflow of capital (Edison, Klein, Ricci and Sloek, 2002).
The first research problem presented by the arguments above is how the
governments and monetary authorities of emerging economies can align
their policies in order to benefit from globalisation. This study will monitor
economic growth as emerging countries open their economies – more
specifically, as they relax capital controls.
1.1.2.
WHY GRADUAL APPROACH?
Takacs (1990) warns against the big-bang approach of eliminating quotas
because it may lead to problems in adjustment and the balance of
payments.
14
Edison, Klein, Ricci and Sloek (2002) quote from the report of the Managing
Director of the International Monetary Fund (IMF) to the International
Monetary and Financial Committee (IMFC) on Progress in Strengthening the
Architecture of the International Financial System and Reform of the IMF,
saying, “In a number of discussions in recent years on issues related to
capital account issues, the Executive Board has emphasized the substantial
benefits of capital account liberalization, but stressed the need to carefully
manage and sequence liberalization in order to minimize risks.”
Capital account liberalization should not be viewed as a one-shot, all-ornothing phenomenon that under all circumstances is welfare-improving; a
pragmatic policy would design a gradual and opportunistic approach to
capital account liberalization that takes into account individual country
circumstances (Prasad and Rajan, 2008).
Visser (2002) however argues that easing of exchange control is noble, but
the process is critical and dangerous. Gradual easing of exchange controls
can be catastrophic as speculators exploit expectations of further easing,
creating a constant negative bias to the currency.
15
The second research problem raised by the arguments above is about the
pace of relaxation of capital controls, and this shall also be further explored
by this research.
1.1.3.
CONCLUSION
Zagha and Nankani (2006) claim that the financial liberalization that took
place in developing countries in the late 1980s and the 1990s was sparked
by the growing difficulties of using capital controls in a world of increased
trade, travel, migration and communications. It differed in timing, speed,
and content across countries. It often involved giving central banks more
independence, opening up capital accounts, and privatizing state banks
and pension systems.
Quite substantial research has been done on the relaxation of capital
controls, but there are mixed results – especially when studying emerging
economies. The major contributing factor to this phenomenon is the fact
that emerging economies have different economic arrangements, which
poses a challenge to conventional economic reforms policies.
Due to globalisation forces, countries are forced to partner and have
arrangements to exchange goods and capital, and this makes relaxation of
16
controls inevitable. As a result, the focus has shifted to the approach and
the pace of relaxing capital controls. This research provides more insights
into the pace and the approach of relaxing capital controls.
1.2.
RESEARCH OBJECTIVES
The aim of this research is a causal study on the impact of relaxation of
capital controls on economic growth. The research further compares
economic performance of those emerging economies that relaxed their
foreign exchange controls at a gradual pace and those that adopted a
big-bang approach.
A total of 67 emerging economies – grouped into four continents of
developing economies, namely Asia, Oceania, Latin America and Africa –
as well as economies in transition in Europe are utilised in the study. GDP
measures economic performance over a period of 25 years – 1980 to 2005.
Gwartney and Lawson (2007) provide the Economic Freedom of the World
(EFW) indices and specifically the international market capital controls that
is the foreign exchange controls measure in this study.
Canales-Kriljenko (2004) acknowledges that foreign exchange markets in
developing markets are often the most active and important asset in
17
developing and transition economies, yet little research on the subject
have systematically documented their structures and main characteristics.
This research seeks to provide empirical evidence to support either side of
the argument on the relaxation of foreign exchange controls and the pace
at which they are relaxed, and will attempt to provide economic
characteristics and structures of emerging economies.
1.3.
IS THERE A NEED FOR THIS RESEARCH?
Edison, Klein, Ricci and Sloek (2002) point out that while industrial countries
have largely liberalized their capital accounts, and there has been some
movement towards more widespread capital account liberalization among
developing countries, the majority of developing countries retain controls
over capital flows.
There is mixed evidence that capital account
liberalization promotes long-run economic growth in emerging economies.
18
Figure 1: Capital inflows to emerging economies
Dorsey (2008) state that the increased flows shown by Figure 1, are being
attracted by improved economic policies, a liberalized trade and
investment environment, and more stable economic performance.
In support of performing this study, Berggren (2003) states that Adam Smith
argued that market processes satisfy people’s demands spontaneously.
Even though he (Adam Smith) realized that free markets are not perfect, he
understood that, generally speaking, they, more than any alternatives, are
able to advance wealth and welfare. The question is: Should the emerging
economies embrace free market processes as is, and what level of
pragmatism is required?
19
Berggren (2003) states that research on economic freedom is still at an early
stage and calls for more carefully designed causality studies; studies of
more variables that economic freedom can be expected to affect; and a
continuing development of economic theory that puts the role of
institutions at the centre of the analysis.
Kose and Prasad (2004) provide support that the evidence is not quite as
compelling as the theory, however. While emerging market countries that
have liberalized their capital accounts typically have had higher growth
rates, on average, than those that have not, this association does not imply
a causal relationship.
This research is carefully designed to give compelling evidence to support
either side of the argument. It focuses on emerging economies; and utilises
data collected from a reliable source – the IMF – and performed over a
period of 25 years. The outcome of this research is a major contribution to
the literature of macroeconomics.
20
1.4.
WHY SOUTH AFRICA IN PARTICULAR?
Arora and Vamvakidis (2005) state that South Africa is often described as
an engine of growth in Africa, in the sense that South African economic
growth is believed to have a substantial impact on growth in other African
countries. This is achieved through international trade, with higher South
African growth contributing to a rise in import demand that is directly
reflected in an increase in the net exports of other countries. In theory,
higher international trade infuses international movement of capital.
Emerging market countries have not been able to use international
financial markets effectively to reduce consumption volatility. International
investors are willing to lend to them in good times but tend to pull back in
bad times, thereby amplifying swings in the domestic macro-economy
(Kose and Prasad, 2004).
Therefore South Africa as an emerging economy in Africa has to do well in
its economic reforms and use the international financial markets effectively
to benefit the country and the continent. It is believed that the literature
gathered and the outcomes of the study will be used for future MBA class
discussions and will be beneficial to the monetary authorities of South
Africa.
21
2. LITERATURE REVIEW
The governments and monetary policy authorities of emerging markets,
going through economic reform, are facing a dilemma as to whether they
should relax exchange controls; and if they do, the second question is what
the speed of relaxing controls should be to positively impact economic
performance. The topics below assess literature from other research work
done on this topic and seek to provide clarity and define all components of
the study.
2.1.
BALANCE OF PAYMENTS AND FOREIGN EXCHANGE
CONTROLS
McAleese (2004) defines the balance of payments as a statement of all
transactions between residents of home country and the outside world
during a specified period of time. These transactions are grouped under
two accounts – the current account and the capital account.
The current account is a record of cross-border transactions in goods,
services, balance of trading and investment income also known as factor
income, and unilateral transfers also known as balance of international
transfers.
22
Capital account in a country’s balance of payments covers a variety of
financial flows, mainly FDI, portfolio flows (including investment in equities or
stock market), and bank borrowing which have in common the acquisition
of assets in one country by residents of another. It is possible, in principle, to
control these flows by placing restrictions on those flows going through
official channels (Kose and Prasad, 2004).
Stock markets provide services to the non-financial economy that are
crucial for long-term economic development. The ability to trade securities
easily may facilitate investment, promote the efficient allocation of capital,
and stimulate long-term economic growth. Policymakers should consider
reducing impediments to stock market development. Easing restrictions on
international capital flows would be a good place to start (Levine, 1996).
Countries favour FDI (as shown by Figure 2), among other reasons, because
it usually involves flows that are relatively long term and not subject to rapid
reversals associated with changes in investor sentiment. Some countries,
like Chile, have also used selective capital controls to try to induce a shift
from shorter to longer term inflows by imposing an implicit tax on capital
inflows reversed within less than a year (Kose and Prasad, 2004).
23
Figure 2: FDI to emerging economies
Foreign exchange controls are defined as limits on the amount of foreign
currency that can be taken into a country, or of domestic currency that
can be taken abroad (The Economist, 2008).
Foreign exchange controls can be broadly classified into two categories:
(a) administrative or direct controls, and (b) market-based or indirect
controls. Direct controls restrict capital transactions and the transfer of
funds through outright prohibitions, including restrictions on capital account
transactions, restrictions on current account transactions, repatriation
requirements and restrictions on the use of funds. Market-based controls
include multiple exchange rate systems, taxation of cross-border flows, and
24
other indirect regulatory controls. These types of controls affect capital
movements indirectly by increasing the costs associated with capital
movements and associated transactions (Asiedu and Lien, 2004).
According to Frenkel, Nickel, Schmidt and Stadtmann (2001) a capital
control that can be modelled as a tax on capital flows can reduce
exchange rate volatility following different types of shocks, but, at the same
time, two additional effects occur. First, since the tax leads to a new steady
state of the economy, its implementation initially triggers exchange rate
volatility, including overshooting, which is the phenomenon it tries to curtail.
Second, capital controls increase the risk premium of domestic assets so
that the domestic interest rates rises and the incentives to invest in the
capital of the economy decrease.
This research focuses on administrative or direct controls employed on
portfolio flows and FDI forms of capital account markets in emerging
economies.
2.2.
ECONOMIC GROWTH
Gross national product (GNP) is the output produced by productive factors
owned by permanent residents of a country, whereas the gross domestic
25
product (GDP) is the output produce by the productive factors located in
the country, regardless of their owner’s nationality (McAleese, 2006).
Kyrkilis and Pantelidis (2003) suggest that GNP is the most important
determinant of outward FDI.
The outward FDI position of countries is
influenced by national characteristics, and the same type of endowments
have different significance for different countries.
For the purpose of this study, GDP rate is used since the focus is on the
economic growth due to capital that is owned by locals and foreigners in
emerging countries.
2.3.
ECONOMIC FREEDOM
Economic freedom and political democracy is not the same thing.
Democracy relates to political decision-making, and economic freedom
relates to interaction through exchange and markets. Economic freedom is
about the freedom of individuals to decide how they will develop and use
their productive abilities, exchange goods and services with others,
compete in markets, and keep the fruits of their labour (Gwartney and
Lawson, 2007).
26
This research focuses on the components that are designed to measure
restraints that affect international exchange, namely administrative
restraints, and exchange rate and capital controls.
Ball and Rausser (1995) discovered that after a period of about five years of
economic reform, the political regime and economic performance of a
country correlate. The politically more open countries tend to do better in
inflation controlling.
No single reform by itself is sufficient for fast growth or for sound
development. A moderate degree of freedom is necessary in political and
economic areas to improve growth perspectives (Vega-Gordillo and lvarezArce, 2003).
Rogoff (2002) further warns that even where some limited form of capital
control is warranted on economic grounds, actual implementation is all too
often dominated by political considerations, and the results are not pretty.
A few powerful political stakeholders benefit but only at a high cost to other
citizens.
27
Although these arguments present an interesting case for South Africa,
which became a democratic state in 1994 and has, to a large degree,
adopted “economic freedom” policies, this research is not set to prove the
relationship between political and economic freedom, and it assumes
political impact to be constant.
2.4.
EMERGING ECONOMIES
Emerging economies are low-income, rapid-growth countries using
economic liberalization as their primary engine of growth. They fall into two
groups: developing countries in Asia, Latin America, Africa and the Middle
East; and transition economies in the former Soviet Union and China
(Hoskisson, Eden, Lau and Wright, 2000). This research focuses a lot on the
developing economies that are stratified into four continents, namely Asia,
Africa, (Latin) America and Oceania.
Morgan Stanley Capital International (MSCI) provides some characteristics
of these emerging economies as follows: emerging markets generally do
not have the level of market efficiency and strict standards in accounting
and securities regulation to be on par with advanced economies (such as
the United States, Europe and Japan), but emerging markets will typically
28
have a physical financial infrastructure, including banks, a stock exchange
and a unified currency.
Emerging economies have standards of living lower than developed
economies and economies in transition. Many have deep and extensive
poverty.
Developing countries are usually importers, rather than
developers, of innovations in science and technology. They also tend to be
more vulnerable and weak to sudden economic shocks.
The countries in this list include those that are not considered either High
Income or Economies in Transition (UNCTAD, 2006). This research focuses a
lot on the developing economies class of emerging economies.
Emerging markets are sought out by investors for the prospect of high
returns, as they often experience faster economic growth as measured by
GDP. Investments in emerging markets come with much greater risk due to
political instability, domestic infrastructure problems, currency volatility and
limited equity opportunities (many large companies may still be "state-run"
or private). Also, local stock exchanges may not offer liquid markets for
outside investors. Bodenstein, Plumper and Schneider (2003) note that on
29
average governments in transition lifted non-tariff barriers to trade and
raised capital controls at the same time.
These policies are contradictory and this raises the need for more research
work to be done in emerging economies to help educate governments
and monetary authorities of these countries so that they can formulate
sound policies.
2.5.
CAPITAL ACCOUNT LIBERALIZATION
Kose and Prasad (2004) aver that capital account liberalization poses major
risks if implemented without supporting policies.
Opening the capital
account while maintaining a fixed exchange rate regime has been
followed by crisis in many countries. Countries that have maintained or only
gradually eased capital controls while moving toward a more flexible
exchange rate regime generally seem to have had better outcomes.
Capital controls exert negative effects on growth because they induce a
dampening effect on investment activity. Policymakers – in deciding about
the appropriateness of capital controls – need to weigh the negative
growth effect of this policy against the possible positive effect of reduced
exchange rate volatility (Frenkel, Nickel, Schmidt and Stadtmann, 2001).
30
According to Obstfeld (2004), the superior performance of the emerging
economies should not only be ascribed to financial openness but also to
the superior institutional infrastructure of the economy. Improvement of
that infrastructure is critical, both in moving the poorest countries toward
improved living standards and in ameliorating the difficulties emerging
economies have encountered during financial globalisation.
The studies that cover an appropriate period of time seem to find an
inverse relationship between foreign exchange controls and economic
performance (Asiedu and Lien, 2004). This is further supported by De Haan
and Sturm (2000) stating that that greater economic freedom fosters
economic growth.
2.6.
CAPITAL ACCOUNT LIBERALIZATION IN EMERGING
ECONOMIES
Prasad, E.S. and Rajan, R. (2008) state that the main benefits of capital
account liberalization for emerging markets appear to be indirect, more
related to their role in building other institutions than to the increased
financing provided by capital inflows. Emerging countries do not have
much of a choice but to plan for capital account liberalization, because
31
capital accounts are de facto becoming more open over time irrespective
of government attempts to control them.
To poor countries with weak policies and institutions, capital account
liberalization should not be a major priority. However, poor countries that
are resource-rich have to deal with capital inflows and their mixed benefits,
and therefore need to ensure that capital account liberalization is aligned
and supported by other policies. This is the lesson for South Africa and other
African countries.
Harvie (1999) concludes, after studying China’s economic reform, that
there is no simple or singular blueprint for the successful economic transition
from a planned to a market economy. A number of key policy areas can
be identified, however, including that of macroeconomic stabilisation,
price and market reform, restructuring and privatisation, and the need to
redefine the role of the state.
While there is general agreement on these basic measures, major
disagreement exists about the sequencing of such reforms. The two major
approaches are that of a big-bang versus a gradual approach. However,
in reality the big-bang approach has been primarily limited to the
32
implementation of a rapid macroeconomic stabilization program, with the
process of restructuring the economy – including that of privatisation and
the development of institutions required in the context of a market
economy – taking a much longer period of time.
Asiedu and Lien (2004) argue that capital controls have no impact on FDI
to sub-Saharan Africa and the Middle East. This may be explained by the
fact that FDI in the two regions are resource seeking, mainly in fuel, oil and
mineral resources. Such investments tend to be less sensitive to the policy
environment and country conditions. Another explanation is that foreign
investors do not consider government liberalization policies as credible. A
third explanation for the ineffectiveness of liberalization is that the restrictive
policies did not bind in the first place.
2.7.
SOUTH AFRICA’S FOREIGN EXCHANGE CONTROLS
Geography is a factor that should be taken into account in explaining
cross-country variations in growth rates; geographic location is an
unalterable fact, and there is nothing that can be done about it, though
much can be done in terms of the other determinants of economic growth
(Cole, 2003).
33
Mbaku (2003) feels that if African countries are to deal effectively with
poverty and significantly improve living standards, they must create
institutions that protect property rights and allow individuals the freedom to
engage in mutually beneficial trade by adopting a constitution that
safeguards economic freedom.
Increased flows are being attracted by improved economic policies, a
liberalized trade and investment environment, and more stable economic
performance in many countries. During the 1990s, net capital flows to
developing countries increased markedly. In 1996, net private capital flows
were $190 billion, almost four times larger than in 1990. During 1990-97,
annual net private capital inflows were also larger than those preceding
the 1982 debt crisis, and more heavily concentrated. Most of the surge was
concentrated in Asia and Latin America (Lopez-Mejia, 1999)
Stals (1999), the former South African Reserve Bank Governor, highlights that
the important precondition for the incorporation of the South African
financial markets in the global economy was the lifting of exchange
controls. The country relied on the inflows of capital to generate the foreign
exchange reserves that would be needed for the financing of any outflows
following the removal of the controls.
34
Harris (1999) points out that South Africa is the only country in sub-Saharan
Africa with sophisticated financial markets and substantial private capital
inflows, and thus it can benefit from foreign investments.
Exchange controls were first introduced in South Africa during the Second
World War as a means of protecting South Africa's foreign exchange
reserves.
Recent years have seen a relaxation in exchange control
regulations in South Africa. The dual currency system of the financial and
commercial rand was abolished on 13 March 1995. Any investment or
repatriation of capital is now through the medium of the rand (Dasso, 2007).
South Africa, since 1994, has gradually relaxed capital controls but retains
some, including the requirement that exporters repatriate their foreign
exchange earnings within six months. These types of requirements deter
FDI. The strength of the rand may present an opportune time to ease
capital controls further (Ahmed, Arezki and Funke, 2005).
Dasso (2007) provides a summary of capital control relaxation efforts
affecting South African individuals and corporates, and some are listed
35
below. (The detailed and updated descriptions can be sourced from the
SARB Exchange Control Manual.)
ƒ
The blocked assets owned by foreigners are being unwound.
ƒ
The limits permitted for pension funds and unit trusts invested offshore
have been increased over the period, and from October 2005 it was
at an overall limit of 15% of total assets.
ƒ
With effect from 26 October 2004, exchange control limits applicable
to foreign direct investments by South African corporates were
completely abolished.
ƒ
Offshore loans accessed after 18 February 2004 are subjected to fewer
exchange control restrictions.
ƒ
The exchange control requirement that companies and mandated
parastatals must obtain a majority (50% +1) interest in all foreign direct
investments is replaced with the lower requirement of a significant
interest of at least 25%.
36
ƒ
Banks will be allowed to hold non-African foreign assets of up to 20% of
their domestic regulatory capital, and African foreign assets of up to
40%.
ƒ
Restrictions on current account transactions, such as the transfer of
buying commissions, payment for computer packages purchased on
a commercial basis, maintenance payments in respect of computer
software, and the importation of books, newspapers, periodicals as
well as medical preparations and correspondence course material no
longer apply.
ƒ
Payments for services rendered by non-residents will, in most cases, not
require exchange control approval; this includes directors' fees
payable to non-residents.
ƒ
South African individuals are allowed to purchase fixed property in
Southern African Development Community countries.
ƒ
Foreign companies, governments and institutions may list on South
Africa's bond and securities exchanges, and South African private
37
individuals are able to invest, without restriction, in inward listed
instruments on South African exchanges.
ƒ
South African corporates are allowed to retain foreign currency
earnings in the form of export proceeds and service receipts for up to
180 days.
ƒ
South African institutional investors may invest an additional 5% of their
total retail assets in African securities issued and listed on the JSE
Limited by acquiring foreign currency denominated portfolio assets in
Africa through foreign currency transfers from South Africa, or
indirectly, by acquiring rand denominated foreign exposures via an
inward listed African security.
ƒ
Restrictions on the opening and operation of customer foreign
currency accounts with local authorised dealers by businesses making
profits or commissions on foreign transactions are removed, subject to
the 180-day limit for the repatriation of funds.
38
ƒ
South African corporates are allowed to utilise part of their local cash
holdings to repay up to 20% of outstanding foreign debt raised to
finance foreign investments.
ƒ
South Africans are allowed to make imports over the internet and pay
with their credit cards. The limit per transaction is R20 000.
ƒ
Of paramount importance, the JSE has been granted permission to
establish a rand currency futures market. This will enable South African
investors to participate directly in the currency market through a
transparent and regulated domestic channel.
Ahmed, Arezki and Funke (2005) discovered that for South Africa, there are
a number of policy variables that contribute to the lower share of FDI and
higher share of portfolio flows. South Africa also scores lower than its major
competitors in terms of growth, infrastructure, and law and order. They
suggest that lower currency volatility would contribute to an increase in the
share of FDI. Additional trade liberalization should help increase South
Africa’s attractiveness as a destination for FDI. And, although South Africa
has increased its net international reserves significantly to fight volatility,
39
compared with other emerging market economies, South Africa’s foreign
reserves, however, remains somewhat low.
Reinhart (2005) states that no policy recipe can ensure the best use and the
most sustained inflow of capital. Successful policy responses have varied
across countries and have not relied on a single instrument. Several factors
determine the appropriate policy response in a particular country, including
its record in fighting inflation, the openness of its economy to foreign trade,
the state of public finances, the size and liquidity of the domestic bond
market, the health of domestic banks, the flexibility of fiscal policy, and the
quality of the regulatory and supervisory framework designed to oversee
the financial sector. South Africa is applauded for its world class financial
sector.
2.8.
OTHER RESEARCH STUDIES
Out of a number of statistical studies that have been done on this subject,
the only study that closely resembles the one done on this research was
done by Edison, Klein, Ricci and Sloek (2002).
They estimated the effects of a variety of measures of capital account
liberalization on economic growth. They presented estimates of growth
40
regressions that augment a standard economic growth model with
different indicators of capital account openness or stock market
liberalization.
2.8.1. ECONOMIC FREEDOM INDICATORS EMPLOYED
A variety of economic freedom indicators or measures, discussed below,
were constructed from published regulations.
The Share Measure used the information from the IMF’s Annual Report on
Exchange Arrangements and Exchange Restrictions to construct, for each
country, a variable reflecting the proportion of years in which countries had
liberalized capital accounts.
An Intensity Measure attempted to capture the intensity of enforcement of
controls on both the capital account and the current account through a
careful reading of the narrative descriptions in the Annual Report on
Exchange Arrangements and Exchange Restrictions.
The OECD (Organisation for Economic Co-operation and Development)
Code of Liberalization of Capital Movements was an alternative measure of
capital account liberalization, albeit one available only for OECD member
41
countries. It was provided in various issues of the Code of Liberalization of
Capital Movements published by the OECD about every other year.
Montiel and Reinhart, in a series of papers, developed and used an
alternative measure of intensity of controls on international transactions
based on annual information for 15 countries (Argentina, Brazil, Chile,
Colombia, Costa Rica, Czech Republic, Egypt, Indonesia, Kenya, Malaysia,
Mexico, Philippines, Sri Lanka, Thailand, and Uganda) for the period 1990–
1996.
2.8.2. RESEARCH OUTCOMES
Edison, Klein, Ricci and Sloek (2002) concluded that there is mixed evidence
that capital account liberalization promotes long-run economic growth.
They suspect that this was because their study could not present a common
cross-country picture of capital account openness and that their indicators
were somehow imperfect.
Edison, Klein, Ricci and Sloek (2002) close by pointing out that as better
indicators are developed, and as a longer time series that encompasses a
wider range of experiences is obtained, it would be expected that the
understanding of this important topic will be refined.
42
43
2.8.3. CONCLUSION
This proposed research will employ the Economic Freedom of the World
(EFW) index provided by Gwartney and Lawson (2007), which present a
cross country picture over a period of 25 years (1980 to 2005).
Cole (2003) supported the use of the EFW index as the measure of
economic freedom and stated that it is quite robust with respect to major
changes in the model specifications. It is, moreover, a report card with
considerable predictive power.
The highest number of emerging economies studied by Edison, Klein, Ricci
and Sloek (2002) is 29, and this study covers 69 emerging economies over
the same period of time. Therefore it can be confidently stated that the
results from the study done on this research are more robust and that this
study provides sound ground for future researches.
44
3. RESEARCH PROPOSITIONS
The aim of the intended research is to do a causal study on the impact of
relaxation of capital controls on the economic growth of emerging
economies. The research will further compare economic performance of
those emerging economies that relaxed their foreign exchange controls at
a gradual pace and those that adopted a big-bang approach. The
following propositions are made for the research.
3.1. PROPOSITION 1
Relaxation of capital controls increases the GDP in the emerging
economies.
3.2. PROPOSITION 2
Gradual abolishment of capital controls improves the GDP in emerging
economies.
A lot of research work has been done to test Proposition 1 but the results are
not conclusive, especially when studying emerging economies.
As
highlighted by Edison, Klein, Ricci and Sloek (2002) the major concern is to
obtain accurate indicators of economic freedom.
45
The literature reviewed supports Proposition 2 but there is no quantitative
study done (not even for developed economies) to prove that gradual
relaxation of capital controls improve economic performance. The studies
done in the proposed research are critically chosen to provide robust results
about the pace of relaxation.
46
4. RESEARCH METHODOLOGY
This was a causal research to study the relationship between capital control
relaxation and economic performance of emerging economies. Zikmund
(2003) defined causal research as a research conducted to identify causeand-effect relationships among variables when the research problem has
already been narrowly defined.
The research design for this quantitative research was a secondary data
study. Zikmund (2003) defined secondary data as data that have been
previously collected for some purpose other than the one at hand.
Econometric data to measure economic performance of countries was
sourced from credible sources, namely the IMF and United Nations (UN).
The EFW report by Gwartney and Lawson (2007) provided the EFW index for
all countries in the world under the jurisdiction of the IMF and the World
Bank.
The EFW index measured the degree to which the policies and institutions of
countries support economic freedom.
The cornerstones of economic
freedom are personal choice, voluntary exchange, freedom to compete,
and security of privately owned property. Forty-two data points were used
to construct a summary index and to measure the degree of economic
47
freedom in five broad areas: (1) size of government; (2) legal structure and
security of property rights; (3) access to sound money; (4) freedom to trade
internationally; and (5) regulation of credit, labour and business.
This index included a number of new components based on the World
Bank’s Doing Business ratings.
The index used in this research was under the fourth component above,
namely freedom to trade internationally. The components in this area are
designed to measure a wide variety of restraints that affect international
exchange: tariffs, quotas, hidden administrative restraints, and exchange
rate and capital controls. In order to get a high rating in this area, a
country must have low tariffs, a trade sector larger than expected, easy
clearance and efficient administration of customs, a freely convertible
currency, and few controls on the movement of capital (Gwartney and
Lawson, 2007).
The international capital market controls index is comprised of foreign
ownership or investment restrictions. This sub-component is based on the
following two questions in the Global Competitiveness Report: “Foreign
ownership of companies in a country is rare, limited to minority stakes and
48
often prohibited in key sectors (= 1) or prevalent and encouraged (= 7)”;
and, “In a country, rules governing foreign direct investment are damaging
and discourage foreign direct investment (= 1) or beneficial and
encourage foreign direct investment (= 7)”. This information is sourced from
the World Economic Forum Global Competitiveness Report (Gwartney and
Lawson, 2007).
The second sub-component is capital controls. The IMF reports on up to 13
different types of international capital controls. The 0 to 10 ( where 0
represents a typically tightened capital controls and 10 typically relaxed
controls) rating is the percentage of capital controls not levied as a share of
the total number of capital controls sourced from the International
Monetary Fund, Annual Report on Exchange Arrangements and Exchange
Restrictions(Gwartney and Lawson, 2007).
This research focused on the capital controls subcomponent, and the
international capital market controls index was used as just a capital control
index. The index presented an independent value that was defined by
Zikmund (2003) as a variable that is expected to influence the dependent
variable. The GDP sourced from the IMF website was the dependant
variable; Zikmund (2003) defined it as the variable that is to be predicted or
49
explained. The dataset, the capital control relaxation index and economic
growth, is shown in Appendix A.
A statistical analysis of this causal study was performed to prove any
relationships as stated by the propositions in Chapter 3.
4.1. POPULATION
Although emerging economies contain approximately 80% of the global
population, they represent about 20% of the world's economies, and have
poor-run institutions that make it difficult for recognisable institutions like the
World Bank and the IMF to access information from them. It was therefore
impractical to quantify the number of emerging economies participating in
the global market.
However, the United Nations Conference on Trade and Development
(UNCTAD) Handbook of Statistics (2006) has a total of 169 developing
economies that were geographically grouped as follows: 57 in Africa, 44 in
America, 40 in Asia and 28 in Oceania. There are few transition economies
listed, and as such this study included a high number of developing
economies.
50
51
4.2. SIZE OF THE SAMPLE
For the purpose of this study, a sample of the economic leaders among
developing countries that are generally seen as the emerging market were
utilised. A total of 67 (with capital control relaxation index being the limiting
factor) emerging economies selected are as shown by the table below.
AFRICA LATIN AMERICA ASIA OCEANIA Algeria Benin Botswana Argentina Bahamas Belize Burundi Cameroon Central African Republic Chad Congo Bolivia Brazil Chile Colombia Costa Rica Dominican Republic Côte d'Ivoire Democratic Republic of Congo Egypt Ethiopia Gabon Ghana Guinea‐Bissau Jamaica Kenya Madagascar Malawi Mali Mauritius Niger Nigeria Senegal Sierra Leone Togo Trinidad and Tobago Uganda Ecuador El Salvador Haiti Honduras Hungary Mexico Nicaragua Panama Paraguay Peru Uruguay Venezuela China India Indonesia Islamic Republic of Iran Malaysia Pakistan Philippines Sri Lanka Fiji EUROPE Russian Federation Syrian Arab Republic Thailand Turkey United Arab Emirates 52
AFRICA Rwanda South Africa Tunisia Zambia Zimbabwe LATIN AMERICA ASIA OCEANIA EUROPE Table 1: Emerging economies
The convenience sampling procedure was employed because the UN and
IMF are world recognisable and trustworthy organisations and their
publications are comprehensive. Secondly, there was sufficient literature
on these countries to perform a proper study. The greatest motivation for
choosing these countries was the availability of data to perform a study,
namely the EFW index and GDP. Zikmund (2003) defines convenience
sampling as a sampling procedure used to obtain those units most
conveniently available. Compared to previous studies done on emerging
economies, this was by far the largest sample; hence accurate results are
expected from this research.
The unit of analysis for this research is emerging economies. To effectively
test the dependent variable which is economic performance, these
emerging economics were grouped to sample frames, for example as per
region. The regions are Asia, America, Africa and Oceania.
53
4.3. PROCESS OF DATA ANALYSIS
To test for the propositions described in chapter 3, two statistical tests were
performed. The pace of relaxation of capital controls was calculated as a
difference between consecutive points, i.e. CC (n) = CC(x+1)-CC(x), where
CC represents capital control relaxation.
Firstly, the median graph to visually check if there was any relationship
between the relaxation of capital controls and the economic performance
of the emerging economies grouped in continents was drawn in Excel.
To quantify this relationship, a correlation report was drawn (in NCSS) to see
if the there was correlation between the capital control relaxation index
and GDP rate, and to what level of significance that correlation was. If
there is correlation, the coefficient must be < 0.05 for a 5% or < 0.01 for a 1%
level of significance, and the strength of that correlation is measured by R2.
At first, the regression analysis was considered but it was eliminated from the
analysis because there were only ten points to plot and the test was not to
test linear relationship between two variables, rather it was done to see if
the GDP rate did follow capital control adjustments.
54
4.4. DEFENDING THE METHODOLOGY
The most critical component of the dataset was the EFW index. The
accuracy of the results depends on this index. As previously mentioned, the
EFW index as the measure of economic freedom was quite robust and is a
report card with considerable predictive power.
Ayal and Karras (1998) identified six elements of EFW which were shown to
be statistically significantly correlated with multifactor productivity and
capital accumulation.
Freedom of citizens to engage in capital
transactions with foreigners was one of them.
To show the general behaviour of emerging economies grouped all
together or in continents, the median and the mean graph were plotted.
Zikmund (2003) defines these measures as follows: the mean is the measures
of central tendency, the arithmetic average; and the median is the
measure of central tendency that is the midpoint, the value below which
half the values in the sample falls. The mean takes all data points into
consideration, but might be misleading because extreme values can distort
it. It is therefore always better to use it with the standard deviation. The
median is not affected by extreme values, the outliers. After critically
55
analysing the data it was decided that median was a better measure for
this study as it is not affected by the outliers.
The study looked at the impact of economic freedom on economic growth
over a long time series of 25 years, from 1980 to 2005. The EFW indices and
GDP rates were put into a number of different statistical analysis methods to
investigate any relationship between economic freedom and economic
growth.
4.5. LIMITATIONS OF THE RESEARCH
The limitations of the research that was conducted can be summarized as
follows:
ƒ
The impact of other external factors, such as political stability,
competition policy, rule of law, level of corruption and crime, and
private sector and government efficiency are kept constant for this
study.
ƒ
The study will focus on those emerging economies which have enough
data to perform a study. There are possible sampling errors and the
data to be used might not be as accurate.
ƒ
Inaccuracy of the EFW index. Kose and Prasad (2004) pointed out
that there might be limitations to the EFW. They stated that many
developing countries, including a few in Africa, have no significant
56
controls but have experienced only minimal inflows. The IMF (which
has jurisdiction over current account, but not capital account,
restrictions) maintains a detailed compilation of member countries’
capital account restrictions. But even these provide, at best, rough
indications because they do not measure the intensity or effectiveness
of capital controls.
ƒ
The data is sourced from the IMF and World Bank and both these
institutions are regarded as the custodians of a number of economic
reform policies which are routed from open market policies. Therefore
the EFW index might be manipulated to prove that open market
policies are the way to go.
ƒ
Although the study is done over a period of 25 years, from 1980 to
2005, only the fifth-year data is given; as a result the study has a
dataset of only 10 points. This data might be insufficient to make a
definite conclusion that the relaxation of capital controls would lead
to an increase in GDP. A longer time period might be necessary to do
that.
57
5. RESULTS
The results of the research are divided into two sections. The first section
contains results from the tests done to check the impact of relaxation of
capital controls on economic growth, and the second set of results are from
the statistics done to check if the pace of relaxation of capital controls has
an impact on economic growth.
5.1.
IMPACT OF RELAXATION OF CAPITAL CONTROLS ON
ECONOMIC GROWTH
The statistical analysis was performed for all emerging economies grouped
together, and also for geographically groupings, namely Africa, America,
and Asia. Oceania and Europe each had one country and were therefore
excluded from groupings studies. A separate study was then done on
South Africa. On each account two tests were performed, namely median
graphs for visual presentation and a correlation study to quantify results
presented by the graph.
58
5.1.1. AFRICA
5.1.1.1.
MEDIAN GRAPH
The graph below shows the impact of capital control relaxation on
economic growth of emerging African economies. As the controls were
relaxed in 1985, the GDP rate rose from 2.5 to 3.7, but from 2003 the capital
controls were tightened and GDP rate still continued to grow from 4% to
above 5%.
Figure 3: Impact of exchange controls on economic growth (Africa case)
59
5.1.1.2.
CORRELATION STUDY
The Pearson Correlations Section gives the following results.
GDP median CC median GDP median 1.000000 0.473637 CC median 0.000000 0.166732 Table 2: Correlation study for Africa
There is a positive correlation of 0.473637 and the significance level is
0.166732, which is greater than 0.05. This means that there is no significant
association on the 5% level of significance.
R2= (0.473637)2= 22.43%,
therefore only 22% of the variation in GDP pattern can be described by the
relaxation of capital controls.
60
5.1.2. AMERICA
5.1.2.1.
MEDIAN GRAPH
The graph below shows the impact of capital control relaxation on
economic growth of Latin American economies. These economies are
somewhat a bit opened when compared with Africa. There is a somewhat
inversely proportional relationship between capital control relaxation and
economic growth between 1995 and 2002.
Figure 4: Impact of exchange controls on economic growth (America)
61
5.1.2.2.
CORRELATION STUDY
The Pearson Correlations Section gives the following results.
GDP median CC median GDP median 1.000000 0.065133 CC median 0.000000 0.858124 Table 3: Correlation study for America
There is positive correlation of 0.065133 and the significance level is
0.858124, which is greater than 0.05. This means that there is no significant
association on the 5% level of significance. R2= 0.424%, therefore only
0.424% of the variation in GDP pattern can be described by the relaxation
of capital controls.
62
5.1.3. ASIA
5.1.3.1.
MEDIAN GRAPH
The graph below shows the impact of capital control relaxation on
economic growth of emerging Asian economies. These economies are
somewhat a bit opened when compared with Africa, and there is
somehow no synchronism between capital control relaxation and
economic growth.
Figure 5: Impact of foreign exchange controls on economic growth (Asia)
63
5.1.3.2.
CORRELATION STUDY
The Pearson Correlations Section gives the following results.
GDP median CC median GDP median 1.000000 0.145737 CC median 0.000000 0.687885 Table 4: Correlation study for Asia
There is a positive correlation of 0.145737 and the significance level is
0.687885, which is greater than 0.05. This means that there is no significant
association on the 5% level of significance. R2= 2.124%, therefore only
2.124% of the variation in GDP pattern can be described by the relaxation
of capital controls.
64
5.1.4. ALL EMERGING ECONOMIES
5.1.4.1.
MEDIAN GRAPH
The graph below shows the impact of capital control relaxation on
economic growth of all 69 emerging economies. There seem to be a
positive relationship between the capital control relaxation and economic
growth between 1993 and 2000.
Figure 6: Impact of exchange controls on economic growth (All emerging
economies)
65
5.1.4.2.
CORRELATION STUDY
The Pearson Correlations Section gives the following results.
GDP median CC median GDP median 1.000000 0.230194 CC median 0.000000 0.522296 Table 5: Correlation study for all emerging economies
There is a positive correlation of 0.230194 and the significance level is
0.522296, which is greater than 0.05. This means that there is no significant
association on the 5% level of significance. R2= 5.2989%, therefore only
5.2989% of the variation in GDP pattern can be described by the relaxation
of capital controls.
66
5.1.5. SOUTH AFRICA
5.1.5.1.
ECONOMIC FREEDOM AND ECONOMIC GROWTH
The graph below shows the impact of capital control relaxation on
economic growth in South Africa.
There seem to be no relationship
between the capital control relaxation and economic growth.
Figure 7: Impact of exchange controls on economic growth (South Africa)
67
5.1.5.2.
CORRELATION STUDY
The Pearson Correlations Section gives the following results.
GDP median CC median GDP median 1.000000 0.41679 CC median 0.000000 0.23082 Table 6: Correlation study for South Africa
There is a positive correlation of 0.41679 and the significance level is
0.23082, which is greater than 0.05. This means that there is no significant
association on the 5% level of significance. R2= 17.371%, therefore only
17.371% of the variation in GDP pattern can be described by the relaxation
of capital controls.
68
5.2.
IMPACT OF PACE OF RELAXATION OF CAPITAL CONTROLS
ON ECONOMIC GROWTH
Again, the statistical analysis was performed for all emerging economies
grouped together, and also for geographically groupings, namely Africa,
America and Asia. Oceania and Europe each had one country and were
therefore excluded from groupings studies. A separate study was done on
South Africa. On each account two tests were performed, namely median
graphs for visual presentation and a correlation study to quantify results
presented by the graph.
5.2.1.
AFRICA
5.2.1.1. MEDIAN GRAPH
The graph below shows the impact of the pace of capital control relaxation
on economic growth of Africa. The pace of relaxation of capital controls
seems to have an inversely proportional relationship with economic growth
rate.
69
Figure 8: Impact of the pace of eliminating exchange controls on economic
growth (Africa)
5.2.1.2. CORRELATION STUDY
The Pearson Correlations Section gives the following results.
GDP median Change in CC median GDP median 1.000000 ‐0.572733 0.000000 0.106999 Change in CC median Table 7: Correlation study (Pace of eliminating exchange controls in Africa)
70
There is a negative correlation of -0.572733 and the significance level is
0.106999, which is greater than 0.05. This means that there is no significant
association on the 5% level of significance. R2= 32.8023%, therefore only
32.8023% of the variation in GDP pattern can be described by the
relaxation of capital controls.
71
5.2.2.
AMERICA
5.2.2.1. MEDIAN GRAPH
The graph below shows the impact of the pace of capital control relaxation
on economic growth of Latin America. The pace of relaxation of capital
controls seems to have a positive relationship with economic growth rate.
Figure 93: Impact of the pace of eliminating exchange controls on economic
growth (America)
72
5.2.2.2. CORRELATION STUDY
The Pearson Correlations Section gives the following results.
GDP median Change in CC median GDP median 1.000000 0.463417 0.000000 0.208986 Change in CC median Table 8: Correlation study (Pace of eliminating exchange controls in
America)
There is a positive correlation of 0.463417and the significance level is
0.208986, which is greater than 0.05. This means that there is no significant
association on the 5% level of significance. R2= 21.4775%, therefore only
21.4775% of the variation in GDP pattern can be described by the
relaxation of capital controls.
73
5.2.3.
ASIA
5.2.3.1. MEDIAN GRAPH
The graph below shows the impact of the pace of capital control relaxation
on economic growth of Asia. The pace of relaxation of capital controls
seems to have a positive relationship with economic growth rate between
years1985 to 2000.
Figure 10: Impact of the pace of eliminating exchange controls on economic
growth (Asia)
74
5.2.3.2. CORRELATION STUDY
The Pearson Correlations Section gives the following results.
GDP median CC median GDP median 1.000000 0.324798 CC median 0.000000 0.393769 Table 9: Correlation study (Pace of eliminating exchange controls in Asia)
There is a positive correlation of 0.324798 and the significance level is
0.393769, which is higher than 0.05. This means that there is no significant
association on the 5% level of significance. R2= 15.5054%, therefore only
15.5054% of the variation in GDP pattern can be described by the
relaxation of capital controls.
75
5.2.4.
ALL EMERGING ECONOMIES
5.2.4.1. MEDIAN GRAPH
The graph below shows the impact of the pace of capital control relaxation
on economic growth of all emerging economies. The pace of relaxation of
capital controls seems to have no relationship with economic growth rate.
Figure 11: Impact of eliminating exchange controls on economic growth (All
emerging economies)
76
5.2.4.2. CORRELATION STUDY
The Pearson Correlations Section gives the following results.
GDP median CC median GDP median 1.000000 0.140940 CC median 0.000000 0.717589 Table 10: Correlation study (Pace of eliminating exchange controls in all
emerging economies)
There is a positive correlation of 0.140940 and the significance level is
0.717589, which is higher than 0.05. This means that there is no significant
association on the 5% level of significance. R2= 1.986405%, therefore only
1.98640% of the variation in GDP pattern can be described by the
relaxation of capital controls.
77
5.2.5.
SOUTH AFRICA
5.2.5.1. MEDIAN GRAPH
The graph below shows the impact of the pace of capital control relaxation
on the economic growth of South Africa. The pace of relaxation of capital
controls seems to have no relationship with economic growth rate.
Figure 12: Impact of the pace of eliminating exchange controls on economic
growth (South Africa)
78
5.2.5.2. CORRELATION STUDY
The Pearson Correlations Section gives the following results.
GDP median CC median GDP median 1.000000 ‐0.358355 CC median 0.000000 0.343645 Table 11: Correlation study (Pace of eliminating exchange controls in South
Africa)
There is a negative correlation of -0.358355 and the significance level is
0.343645, which is higher than 0.05. This means that there is no significant
association on the 5% level of significance. R2= 12.87629%, therefore only
12.87629% of the variation in GDP pattern can be described by the
relaxation of capital controls.
79
6. DISCUSISION OF RESULTS
This chapter interprets results to details and attempts to answer the research
objectives. It is divided into two sections as per the propositions in chapter
3. Each section will discuss results from each test done, compare it with
literature and then conclude for each proposition.
6.1. RELAXATION OF CAPITAL CONTROLS INCREASES THE GDP IN
THE EMERGING ECONOMIES
Like in Chapter 5, the section is further dived to continents, all emerging
economies grouped together and South Africa on its own.
6.1.1. AFRICA
The visual presentation on Figure 3 shows that when controls were relaxed in
1985, the GDP rate rose from 2.5 to 3.7, but when the capital controls were
tightened from 2003, the GDP rate continued to grow from 4% to above 5%.
Actually it looks like the GDP is lagging behind the capital control
relaxation. The correlation study shows that only 22% of the variation in GDP
pattern can be described by the relaxation of capital controls.
80
It is noted that African countries took some time to open up their
economies and as stated by Vega-Gordillo and lvarez-Arce (2003), there
will be delays reflecting the particular circumstances of each country.
Unfortunately, such delays represent a danger to both freedom and
development.
As discovered by Ball and Rausser (1995), after a period of about five years
of economic reform, the political regime and economic performance of a
country correlates. The politically more open countries tend to do better in
inflation controlling.
The other reason for the rise in GDP when the capital controls are tightened
could be that while generating revenue is not the purpose of the capital
controls, some capital controls imply higher government revenue. Thus,
their spending can have positive effects on the real sector of the economy.
In this case, this effect could mitigate the negative output effects of
applying capital controls (Frenkel, Nickel, Schmidt and Stadtmann, 2001).
The statistical fact that only 22% of the variation in GDP pattern can be
described by the relaxation of capital controls means that the remaining
81
78% can be ascribed to other factors, such as capital inflows from
donations, political stability, domestic output, etc.
In comparison with other emerging market economies, South Africa seems
to be a moderate globaliser. The globalisation process in South Africa is also
mainly driven by trade. Both net FDI inflows and portfolio inflows seem to
have a very limited impact on economic growth in the country due to their
high levels of volatility (Loots, 2006).
As shown by Appendix B, a table of correlations of relaxation of capital
controls and economic growth of individual countries, only in Chad (with
R2=49%) and in Sierra Leone (with R2= 51%) a significant impact of
relaxation of capital controls on economic growth can be recognised.
These countries are poor and, Sierra Leone in particular was dependent on
humanitarian aid for a long time, hence high dependency on foreign
capital.
Asiedu and Lien (2004) argue that capital controls have no impact on FDI
to sub-Saharan Africa. This may be explained by the fact that FDI in the
region is resource seeking, mainly mineral resources. Such investments tend
to be less sensitive to the policy environment and country conditions.
82
Another explanation is that foreign investors do not consider government
liberalization policies as credible. A third explanation for the ineffectiveness
of liberalization is that the restrictive policies did not bind in the first place.
6.1.2. AMERICA
As shown by Figure 4, the impact of capital controls on economic growth of
emerging (Latin) American economies are somewhat a bit relaxed when
compared with Africa and there is an inverse relationship between control
relaxation and economic growth. Only 0.424% of the variation in GDP
pattern can be described by the relaxation of capital controls.
The reason for this poor performance while these countries have relaxed
their capital controls can be attributed to the fact that Latin America was
traditionally plagued by fiscal instability and high inflation.
Elson (2006) noted that unlike Asian countries – where a key driver in the
trade dynamics was FDI by multinational corporations, which are
channelled into manufacturing – in Latin America, during 1996–2000,
roughly half of FDI flows were related to mergers and acquisitions in
connection with the privatization of state-owned utilities and domestic
banks.
83
Appendix B shows a table of the correlations of relaxation of capital
controls and economic growth of individual countries.
Honduras with
R2=41%, Hungary with R2=73% and Panama R2=52% have GDPs that are
significantly dependent on relaxation of capital controls. Unlike Costa Rica,
which has an efficient private sector, these countries have poor domestic
production and highly depend on capital inflows from North America and
from the region.
It can be concluded that even though Latin American countries have
opened up their economies, they have failed to align their fiscal policies
and monetary policies to support their economic reform efforts.
6.1.3. ASIA
As shown by Figure 5, the impact of capital controls on economic growth of
emerging Asian economies are somewhat a bit relaxed when compared
with Africa and there is synchronism between control relaxation and
economic growth. Only 2.124% of the variation in GDP pattern can be
described by the relaxation of capital controls.
84
It is interesting to note that Asian economies are as not as opened as Latin
America’s, but Asia (except for the duration of the Asian Financial Crisis) far
outperforms Latin America. This can also be attributed to the reasons
stated in Section 6.1.2.
Harvie (1999), focusing on China as an “Asian Superpower”, attributes its
success to a number of key developments including the adoption of an
open door policy, which encouraged resource allocation into areas of
production, labour intensive light manufactured goods, the attraction of FDI
and Western technology, a gradual and pragmatic approach to
economic reform, with a logical sequencing of its major measures; the
elimination of market entry barriers and stimulation of competition between
the state and non-state sectors; all underpinned by a gradual approach in
relaxing capital controls. This discussion is continued in Section 6.2.
6.1.4. ALL EMERGING ECONOMIES
As shown by Figure 6, there seem to no relationship between the capital
control relaxation and economic growth of emerging economies grouped
85
together. Only 5.2989% of the variation in GDP pattern can be described
by the relaxation of capital controls.
Collectively, emerging economies have the highest GDP rate of just above
5%. As previously stated by Prasad and Rajan (2008), the main benefits of
capital account liberalization in emerging markets appear to be indirect
and more related to their role in building other institutions than to the
increased financing provided by capital inflows. There, the benefits may not
be manifested by the improved economic performance.
Emerging economies have very diverse economic characteristics among
themselves. In Asia, FDI is attracted by efficient labour and manufacturing,
and in Africa FDI is seeking natural resources. The timing and approach of
capital controls was never aligned right across. Most African countries only
opened their economies in the 80s.
The Asian countries had high
performance irrespective of its relatively closed economy, and African
countries have relatively closed economies and have performed poorly.
With consideration of all these points, it is a huge challenge to collectively
define a common behaviour of these economies as they go through
economic reforms.
86
The other question raised by Prokopijevic (2002), is if advances in economic
freedom lead to growth and prosperity, is it not logical to assume that more
growth would lead to more liberalization? And if so, is it not logical to
expect a rising popularity of permanent liberalization policies simply to
capture the benefits that flow from constant liberalization? He discovered
that growth caused by liberalization does not induce further liberalization
(putting aside some isolated cases), and neither is liberalization a
permanent policy in any state.
6.1.5. SOUTH AFRICA
As shown by Figure 7, there seem to no relationship between capital control
relaxation and economic growth in South Africa. Only17.371% of the
variation in GDP pattern can be described by the relaxation of capital
controls, which is much better than for all emerging countries grouped
together.
With the highest growth rate of about 6%, South Africa still faces challenges
of relatively poor infrastructure, law and order problems and low foreign
reserves. According to Ahmed, Arezki and Funke (2005) lower currency
volatility would contribute to an increase in the share of FDI, and the
87
strength of the rand may present an opportune time to ease capital
controls further.
South Africa is a resource-rich country and has to develop policies that will
help it appropriately invest its foreign capital inflows. It is also seen as the
economic harbour of the African continent, therefore most investors will use
it as the highway to other African countries. This presents an opportunity to
attract FDI, but it needs to correct other factors, especially the political
environment.
6.2. IMPACT OF PACE OF RELAXATION OF CAPITAL CONTROLS
ON ECONOMIC GROWTH
Again, the statistical analysis was performed for all emerging economies
grouped together, and also for geographically groupings, namely Africa,
America and Asia. A separate study was then done on South Africa. On
each account, two tests were performed, namely median graphs for visual
presentation and a correlation study to quantify results presented by the
graph.
This section discusses results of all tests done on emerging countries.
88
As shown by Figure 8, there seem to be an inversely proportional
relationship between the capital control relaxation and economic growth
of emerging African economies.
There is a negative correlation of
-0.572733, and the negative correlation means that as the pace of
relaxation was increased the GDP rate decreased and vice versa. Exactly
32.8023% of the variation in GDP pattern can be described by the
relaxation of capital controls, which is relatively significant.
For America, as shown in Figure 9, the sudden drop in 1987 and the sudden
tightening of capital controls in the early 90s resulted in a sharp fall of the
GDP rate. Only after 2002, when the rate of change of capital control was
kept minimal, there seem to be stable growth. The big-bang approach
employed by Latin America in the early 90s had very severe outcomes, one
of them being high inflation.
As for Asia, as shown in Figure 10, it is clear that the 1997 crisis taught them
financial discipline. Post these financial crises, the capital controls were
gradually opened and systematically controlled, and this resulted in
flourishing economic growth.
89
When all emerging economies are grouped together (as represented by
Figure 11), collectively they adopted a gradual approach from as early as
the early 90s, and this had a positive impact on economic growth.
South Africa as well has managed to improve its GDP by employing gradual
approach of eliminating capital controls in the mid 90s. This is represented by
Figure 12.
Appendix C shows a table of correlations of the pace of relaxation of
capital controls and economic growth of individual countries. In Africa,
only Botswana (with R2=41%), in Europe only Russia (with R2=91), in Latin
America Chile (with R2 =41%) and Paraguay with (R2=56%), and in Asia
Indonesia with (R2=48%) have economic growth that is significantly
dependent on the pace of relaxation of capital controls. It is noted that in
respective
regions,
countries
with
sophisticated
economies
or
controversially-run economic regimes – South Africa in Africa, Brazil in Latin
America and China in Asia – are not featured here. These countries have
employed a gradual approach in relaxing capital controls and their
economies have flourished, and there cannot be a correlation between
the variables.
90
These results are in agreement with the assertion of Prasad and Rajan (2008)
that a pragmatic policy would design a gradual and opportunistic
approach to capital account liberalization that takes into account
individual country circumstances. Failure to comply with this principle can
result in poor performance, as in the case of Latin America.
Kose and Prasad (2004), in support of South Africa and other African
emerging economies, aver that countries that have maintained or only
gradually eased capital controls while moving toward a more flexible
exchange rate regime generally seem to have had better outcomes.
To conclude, Harvie (1999) listed a number of factors that should be
considered by emerging economies going through economic reforms, and
these include the following:
ƒ
The speed, intensity and consistency of implementation of
economic reform policy and liberalization;
ƒ
The extent of liberal entry and competition in markets, both from
domestic sources and foreign; the imposition of hard budget
constraints on state or former state enterprises; and appropriate
fiscal incentives for local governments;
91
ƒ
The degree of openness of the domestic economy to foreign
trade and competition, to FDI and to foreign technology;
ƒ
The availability of domestic savings and the provision of a pool
of funds for desperately needed domestic investment; and
ƒ
The fact that governments have a crucial role to play in
supporting economic growth through the establishment of
good infrastructure, support for technical training and local
technology absorption, and the promotion of exports and FDI.
Those emerging economies, especially in Asia, that have flourished have
the above mentioned factors in common.
Krueger (2004) added that sound governance at the national and
corporate level; effective and respected institutions; a well-established
legal system; recognition of, and protection for, property rights; and a wellfunctioning financial sector are all vital ingredients for lasting economic
success.
Rodrik and Subramanian (2003) concluded from their study that the quality
of institutions overrides everything else. Institutions are the only positive and
significant determinant of income levels. A basic institutional framework
92
includes of rule of law, independent judiciary, free press, and participatory
politics.
93
7. CONCLUSIONS
7.1.
BACKGROUND
Globalisation has forced countries of different economic backgrounds to
exchange goods, services and capital. The financial arrangements that
resulted from these forces have by far supported the developed
economies.
As part of protection from exploitation, fragile emerging
economies have employed a number of economic policies – one of them
being foreign exchange controls.
However, emerging economies depend on foreign capital inflow to grow
their economies, and unfortunately foreign exchange controls lead to
negative sentiments among foreign investors.
This leaves emerging
economies with no choice but to embrace economic reform policies and
relax their capital controls.
The challenge is how these countries,
characterised by poor institutional infrastructure and unstable political
environment, can ensure that they are positively impacted by these
economic reform policies. What policies should be adopted to benefit
from foreign capital? The findings from the research work previously done
on the emerging economies are inconsistent, and there remains a lack of
94
consensus regarding the impact of foreign exchange controls on economic
growth. The other challenge concerns the pace at which these capital
controls should be relaxed. If emerging economies speedily eliminate
controls, will they be able to absorb the pressures from the large capital
inflows with their poor institutions? And if they go slow, will they not miss out
on this opportunity as investors move their capital somewhere else?
This research was conducted to provide empirical evidence about the
impact of relaxation of foreign exchange controls, and about the impact of
the pace of the relaxation of capital controls on the economic growth of
emerging economies.
7.2.
FINDINGS
The research was performed on 67 emerging economies over a period of
25 years, 1980 to 2005. These countries were grouped per continent, and a
separate study was performed for South Africa.
Two tests were performed per group of countries. To provide a common
behaviour of countries a median of control relaxation indices of countries
being studied was calculated and that was plotted with GDP. This visual
presentation was then supported by a correlation study to describe the
95
level of significance in the relationship between capital control relaxation
and economic growth.
The findings reveal that although there is a correlation between capital
control relaxation and economic growth it is of low significance. This effect
was not consistent over the period of study. From the visual presentation it
was noted that the GDP had a response delay of about 5 years after
capital control was relaxed. In contrast to the theory, in Africa, and in South
Africa particularly, there was a higher significance of correlation between
relaxation of capital controls and economic growth. This can be attributed
to the fact that Africa is resource-rich and relative to other continents is
poor, so there is a high dependence on foreign capital inflows that is
received as donations and capital investments on natural resources. This
does not mean that Africa has superior economic policies that ensure
translation of this capital into flourishing economies; it might mean that this
continent needs foreign capital to survive.
The major contribution of this research was on the study of the impact of
capital control relaxation on economic growth. There was clear evidence
that gradual relaxation of capital controls has a positive impact on
economic growth. It was evident from the visual presentations that when
96
there were low adjustments on capital controls, the GDP increased.
American countries who adopted a big-bang approach had very poor
results.
7.3.
SUMMARY
It is statistical proven in this research that the relaxation of foreign exchange
controls has a statistical low significant impact on the economic
performance of emerging economies, and the gradual relaxation of
capital controls impact economic growth positively. Perhaps, it is not just
about relaxing capital controls. If emerging economies have poorly run
institutions, inefficient domestic production, dysfunctional governments and
undisciplined fiscal policies, the perceived benefits of relaxing capital
controls shall never be manifested. Of course the recent world economic
growth led by the USA and UK has been a result of surging commodity
prices, and this pulled up emerging economies as well.
97
7.4.
RECOMMENDATIONS
Monetary authorities and governments of emerging economies have to
embrace economic reform policies and should be very systematic in their
approach. They need to be pragmatic as each country’s policies will
depend on the situation of that country. It is critical that those policies
support investment in building institutional infrastructure to attract more
foreign investors. And such policies should promote domestic savings as
well in order to improve reserves, which attract FDI.
South Africa, as the economic hub of Africa, should continue to gradually
and systematically relax its capital controls and use that to bolster its
infrastructure, especially in transportation to improve the ease of doing
business, which will further attract foreign investment. The floating currency
and inflation targeting do support this economic reform policy.
The current turmoil in financial markets has really challenged capitalism and
its economic liberty or free market policies.
Most importantly, it has
redefined the role of government in a free market system. Much of the
banking industry in the UK and USA has been nationalised. A lesson for
emerging markets is that as they gradually open their economies, they
98
should involve and clearly define the role of government in their attempt to
grow their economies.
7.5.
FUTURE RESEARCH IDEAS
The research was an attempt to use statistical analysis to provide empirical
findings about the impact of foreign exchange controls on economic
growth. There are a few ideas listed below that should be considered for
future research work.
ƒ
A study should be performed that will encompass all the
components of the EFW index, not just foreign exchange
controls.
ƒ
As the EFW index grows, there will be a lot of data points. A
study should be done over a longer period with more data
points.
ƒ
A study should be done that will be independent of IMF
measures.
ƒ
The study should include all developing economies and
economies in transition.
ƒ
Since there is a delay of about five years between capital
control adjustment and GDP rate, perhaps the GDP rate should
be moved forward by 5 years when plotted with capital control
99
index. In that case a linear relationship will be expected and
the more statistical analysis, like regression, can be performed.
100
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1
APPENDICES
Appendix A: GDP and capital control relaxation controls for emerging economies
Algeria International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Argentina International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Bahamas International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Belize International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Benin International Capital Markets Control Index GDP 1980 1985 0
‐5.4
0
5.6
0
1990 0
1.3
0
0
0.7
1995 2
3.8
2
0
‐7
0
2000 1.7
2.2
‐0.3
0
‐1.3
0
2001 1.7
2.6
0
9.5
‐2.8
9.5
2002 2.8
4.7
1.1
6.6
‐0.8
‐2.9
2003 2.7
6.9
‐0.1
5.8
‐4.4
‐0.8
2004 2.9
5.2
0.2
5.2
‐10.9
‐0.6
2005 5.6
8.8
0.4
3.5
5.1
0.6
3.5
9
‐2.1
2.9
9.2
‐0.6
0
7.1
0
4.1
0
5
5
0
‐1.6
0
5
‐1.4
0
0
4.4
0
5
11.2
0
1.5
1.9
1.5
5
0.7
0
1.5
0.8
0
0.8
13
‐4.2
0.8
2.3
‐0.7
0.8
5
0
0.8
1.4
0
0.8
5.1
0
1.5
1.8
0.7
0.8
9.3
0
1.5
2.5
0
0.8
4.6
0
0.8
3.5
0
0
9.3
0
4.3
0
9
0
6
0
4.9
0
6.2
0
4.5
0
3.9
3.4
3.1
3
2.9
Pace of Relaxation of Foreign Exchange Controls
Bolivia International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Botswana International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Brazil International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Burundi International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Cameroon International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Central African Republic International Capital Markets Control Index GDP 1980 1985 0
2
0.6
1990 0
2
‐1.7
0
1995 0
2
4.6
0
2000 0
5
4.7
3
2001 0
7.8
2.5
2.8
2002 0
7.8
1.7
0
2003 0
6.3
2.5
‐1.5
2004 3.4
6.3
2.7
0
2005 ‐0.4
6.2
4.2
‐0.1
5.9
4
‐0.3
5
12
5
7.2
0
0
9.2
5
6.8
0
0
‐6.8
0
7.9
0
5
4.5
0
0
11.8
0
0
‐4.2
0
6.9
8.3
1.9
0
3.5
0
3.6
4.2
3.6
6.9
4.9
0
0
‐7.9
0
4.2
4.3
0.6
7.2
5.7
0.3
0
‐0.9
0
4.2
1.3
0
6.9
6.2
‐0.3
2.3
2.1
0
5.9
2.7
1.7
7.1
6.3
0.2
2.3
4.4
0
5.6
1.1
‐0.3
6.9
3.8
‐0.2
5.5
5.7
‐0.1
2.3
‐1.2
0
6.2
2.9
0.7
2.3
4.8
0
3.9
0.9
0
0
9.9
0
8.1
0
0
‐3
0
‐6.2
0
0
3.7
0
3.3
0
0
‐3.8
0.8
4.2
0.8
0
4.9
0.8
4.5
0
0
1.8
3.9
4
3.1
0
0.3
3.9
4
0
0
‐0.6
4
3.7
0.1
0
‐7.6
3.6
2
‐0.4
0
1.3
0
2.2
1
Pace of Relaxation of Foreign Exchange Controls
Chad International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Chile International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
China International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Colombia International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Congo, Democratic Republic of International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Congo, Republic of International Capital Markets Control Index GDP 1980 1985 0
0
‐6
1990 0
0
7.9
0
1995 0
0
3.2
0
2000 0
0
‐0.8
0
2001 0
0
‐0.9
0
2002 0
0
11.7
0
2003 0
2.3
8.5
2.3
2004 0
2.7
14.7
0.4
2005 0
2.8
33.6
0.1
2.3
7.9
‐0.5
2
7.9
2
2
0
0
7.9
2
3.7
0
2
13.5
2
6.5
10.6
4.5
5
3.8
3
4.3
4.5
‐2.2
4.9
10.9
‐0.1
7
3.5
2.7
2.7
8.4
‐2.2
6.7
2.2
‐0.3
2.7
8.3
0
6.9
4
0.2
3.3
9.1
0.6
7.7
6
0.8
3.4
10
0.1
7.7
5.7
0
3.5
10.1
0.1
3.7
10.4
0.2
0
4.4
0
3.1
0
0
4.3
0
6
5.2
6
3.9
2.9
‐2.1
3.9
1.5
0
2.9
1.9
‐1
4.1
3.9
1.2
3.6
4.9
‐0.5
3.8
4.7
0.2
2
2.4
2
0.5
0
0
12.7
2
‐6.6
0
0
2.4
2
0.7
0
0
1
2.3
‐6.9
0.3
0
4
3.1
‐2.1
0.8
0
7.6
3.1
3.5
0
0
3.8
3.1
5.8
0
0
4.6
2.3
6.6
‐0.8
0
0.8
0
6.5
‐2.3
0
3.5
0
7.8
2
Pace of Relaxation of Foreign Exchange Controls
Costa Rica International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Côte d’Ivoire International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Dominican Republic International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Ecuador International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Egypt International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
El Salvador International Capital Markets Control Index GDP 1980 1985 0
1990 0
1995 0
2000 0
2001 0
2002 0
2003 0
2004 0
2005 0
2
0.8
5
0.7
3
5
3.6
0
8
3.9
3
9.6
1.8
1.6
9.6
1.1
0
8.7
2.9
‐0.9
8.8
6.4
0.1
8
4.3
‐0.8
8.3
5.9
0.3
0
5.2
0
3.6
0
0
‐1.1
0
0
7.1
0
0
‐4.6
0
0
0
0
0
‐1.6
0
0
‐1.7
0
0
1.6
0
0.8
1.8
0.8
2
8
2
‐2.1
0
2
‐5.5
0
2
4.7
0
6.5
8.1
4.5
6.5
3.6
0
5.8
4.4
‐0.7
5.8
‐1.9
0
5.5
2
‐0.3
5.8
9.3
0.3
2
4.9
2
4.4
0
0
3.4
2
3
0
0
7.4
0
5
1.7
3
0
2.3
0
7.7
2.8
2.7
7.1
4.5
7.1
7.7
5.3
0
7.3
5.4
0.2
5.6
4.2
‐2.1
7.3
3.5
0
6.1
3.6
0.5
5.8
3.2
‐1.5
6.7
8
0.6
5.6
3.2
‐0.2
6.7
6
0
5.8
4.1
0.2
6
4.5
0.2
2
‐8.6
2
0.6
2
4.8
5
6.4
8.9
2.2
8.2
1.7
7.3
2.3
7.3
2.3
7.4
1.9
7.5
3.1
3
Pace of Relaxation of Foreign Exchange Controls
Ethiopia International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Fiji International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Gabon International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Ghana International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Guinea­Bissau International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Haiti International Capital Markets Control Index GDP 1980 1985 0
0
4
1990 0
0
‐11.4
0
1995 3
0
2.6
0
2000 3.9
0
6.1
0
2001 ‐0.7
0
5.9
0
2002 ‐0.9
0
7.7
0
2003 0
0
1.2
0
2004 0.1
0
‐3.5
0
2005 0.1
0
13.1
0
3.5
10.2
3.5
5
‐1.7
5
‐3.8
0
0
0
2
5.8
‐3
0
5.8
0
2
4.9
0
0
5.1
0
0
‐1.4
‐2
0
5
0
0
2
0
0
‐1.9
0
0
3.2
0
0
2.1
0
0
1.1
0
0
‐0.3
0
0
5.4
0
0
2.4
0
0
0.7
0
0
1.1
0
0
3
0
0
0.5
0
5.1
0
0
3.3
0
0
4
0
1.5
3.7
1.5
2.3
4.2
0.8
4.8
4.5
2.5
5.2
5.2
0.4
5.4
5.6
0.2
2.3
5.9
‐3.1
0
16
0
4.3
0
0
7.3
5
4.6
5
0
0.8
5
4.4
0
0
‐0.4
0
7.5
‐5
2
3.3
0.8
0.2
0.8
2
1.3
0.8
‐7.1
0
0
‐0.6
0.8
‐0.6
0
2.3
‐0.5
0.8
2.2
0
6.5
0.2
0.8
3.2
0
7.3
‐2.6
9.1
0.4
4
Pace of Relaxation of Foreign Exchange Controls
Honduras International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Hungary International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
India International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Indonesia International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Iran International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Jamaica International Capital Markets Control Index GDP 1980 1985 0
0
0.7
0
4.2
0
0
0.2
0
9.9
0
2.5
0
0
‐14.9
0
4.2
0
2
‐4
0
7.2
0
0
19.6
0
2
‐0.9
3.8
8.2
3.8
0
2.7
0
2
4.9
4.8
5.4
1
0
5.1
0
8
1
3.2
3.6
‐1.6
0
3.7
0
8.2
0.7
8.2
1.5
3.7
5
0.1
0
7.2
0
3.7
5.7
0
0
5.1
0
6.4
2.3
3.7
9
0
6.9
1.1
3.7
7.9
0.1
3.6
4.8
0
0
7.5
0
5.9
4.2
‐2.2
8.1
4.8
‐0.1
3.6
6.9
0
3.6
4.5
0.4
5
4.1
‐0.2
5.2
5
0.3
8.2
4.2
0.1
3.6
4.5
1.6
2005 1.8
4.9
3.5
0.1
8.1
4.4
‐0.7
2
3.9
0
2004 0.8
4.8
2.7
‐1.4
8.8
4.1
4.3
2
5.4
‐0.3
2003 4.2
6.2
2.6
‐0.4
4.5
5.2
‐1.9
2.3
7.6
2.3
2002 2.3
6.6
5.7
1.6
6.4
3.4
6.4
0
5.6
0
2001 ‐2
5
4.1
5
0
‐3.5
0
0
5.3
0
2000 0
0
0.1
0
0
‐0.3
0
0
3.6
1995 2
1990 0
0
4.4
0
6.5
1
6.5
1.4
5
Pace of Relaxation of Foreign Exchange Controls
Kenya International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Madagascar International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Malawi International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Malaysia International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Mali International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Mauritius International Capital Markets Control Index GDP 1980 1985 0
0
5.6
0
4.1
0
0
0.8
5
7.4
5
‐0.9
0
0
3.3
0
‐1.9
0
2
11.4
5
9
0
0
16.5
0
2
4.8
6.2
9.8
1.2
0
2.4
0
2
4.9
3.7
8.9
‐2.5
0
‐3.2
0
8
4.4
3.7
0.3
0
0
12.1
0
7.8
7.2
7.8
4.2
4.1
7.2
0.2
3.3
7.2
‐0.1
3.8
5.2
‐0.3
3.3
2.4
0
6.5
3.8
3.3
2.3
‐0.7
6.1
1.5
4
5
0
3.9
5.5
0.3
3.4
4.3
3.4
4.5
4.6
‐0.1
4.6
5.3
‐0.2
4
4.2
‐0.3
3.6
4.4
‐0.1
5.6
5.8
‐0.2
5.8
4.6
‐0.4
4.8
9.8
0.2
4.3
1.9
3.5
2005 0
6.2
2.8
0
4.6
‐12.7
1.6
0.8
‐4.1
0
2004 0.1
6.2
0.3
0.8
3
6
0
0.8
0.8
‐1.2
2003 ‐0.5
5.4
4.7
0
3
4.7
3
2
13.8
0
2002 ‐1.3
5.4
0.6
‐2.6
0
1.7
0
2
5.7
0
2001 0
8
4.3
8
0
3.1
0
2
4.6
0
2000 0.2
0
4.1
0
0
1.2
0
2
0.4
1995 6
1990 0
3.4
6.1
0.1
6.5
4.7
6.7
3.1
6
Pace of Relaxation of Foreign Exchange Controls
Mexico International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Nicaragua International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Niger International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Nigeria International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Pakistan International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Panama International Capital Markets Control Index GDP 1980 1985 0
2
9.5
2
2.2
0
0
4.6
0
2.9
0
10.5
0
2
8.5
2
7.6
0
8
4.5
0
13.8
0
2
4.5
0
8
4.9
0
2.3
0
2
5
0
8
8.1
7
5.4
7
0.8
4.3
‐1.2
10
1.8
7
3.1
0
0.8
2
0
9.1
2.7
9.1
0.6
6.1
6
0
3.8
4.8
‐0.1
6.2
7.2
0.1
4.2
7.4
0.4
8.8
4.2
0
7.4
0
8.5
2.2
0
‐0.8
0
6.1
10.7
‐0.4
3.9
3.2
3.1
7
4.3
0
7
5.3
‐0.3
0
4.5
0
6.5
1.5
‐0.5
4.5
2.8
0.1
4.4
4.2
‐0.3
7.3
2.5
0.2
0
3
0
2005 0.2
4.7
1.4
‐0.2
7.1
0.8
‐0.9
0
7.1
0
2004 0
4.9
0.8
‐0.2
8
3
0
0
‐1.4
0
2003 0.4
5.1
0
0
8
4.1
3
0
2.6
0
2002 ‐1.7
5.1
6.6
‐1.3
5
5.9
5
0
‐1.3
0
2001 0
6.4
‐6.2
1.4
0
‐0.1
0
0
7.7
0
2000 ‐0.2
5
5.1
3
0
‐4.1
0
0
4.9
1995 6
1990 0
3.7
7.7
‐0.5
7.7
7.5
8.6
6.9
7
Pace of Relaxation of Foreign Exchange Controls
Paraguay International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Peru International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Philippines International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Russia International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Rwanda International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Senegal International Capital Markets Control Index GDP 1980 1985 0
5
11.7
5
3.9
0
2
7.7
0
na
0
na
0
0
‐3.6
0
4.4
0
0
‐0.8
0
na
0
0
0.4
0
0
3.3
3.5
‐4.1
3.5
0
35.2
0
0
‐0.7
2.9
10
‐0.6
1.5
6
1.5
0
5.4
3.2
5.1
0.3
1.5
6.7
0
2.3
3.2
0
4.6
4.1
7.2
0.1
2.3
0.9
0
4
6.4
‐0.1
3.8
4
1.5
3.5
6.7
3.5
4.9
0.6
3.5
0.7
2.9
6.4
‐0.2
4
7.3
0.6
2.3
9.4
0.8
7.8
6.7
0.1
7.7
5.1
0.1
3.1
4.9
0
3.4
4.7
0.2
7.2
2.9
0
7.2
4.1
‐0.3
7.6
4
0
3.1
4.4
‐1.5
2005 0.9
7.5
3.8
0.4
7.6
5
‐1.3
4.6
1.8
0
2004 ‐1.1
7.1
0
0
8.9
0.2
0
4.6
6
‐2
2003 0.3
7.1
2.1
0
8.9
3
0.3
6.6
4.7
4.6
2002 ‐0.6
7.1
‐3.3
‐2.9
8.6
8.6
6.6
2
3
0
2001 0
10
5.5
5
2
‐5.1
0
2
‐7.3
0
2000 ‐0.9
5
2.9
0
2
2.1
0
2
5.1
1995 2
1990 0
3.8
6
0
4.2
5.8
0.8
5.3
8
Pace of Relaxation of Foreign Exchange Controls
Sierra Leone International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
South Africa International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Sri Lanka International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Syria International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Thailand International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Togo International Capital Markets Control Index GDP 1980 1985 0
0
‐0.6
0
‐6.7
0
2
6.6
0
10.5
0
7.3
0
2
4.6
2
4.6
0
0
‐2.3
0
10.4
0
2
11.6
0
0
3.7
0
5.4
0
4.6
9.2
2.6
0
5.9
0
2.3
0
4.3
4.8
‐0.3
0
6.8
0
3.7
0
4.3
2.2
0
0
‐1
0
‐2.3
1
2.8
1
3.3
7.1
‐0.5
1
3.3
0
4
6.3
0.7
0
5.2
3.5
6
‐0.1
0
‐0.2
3.6
5.4
0.1
0
1.1
0
3.8
5.3
‐0.5
3.9
5.1
‐0.3
4.2
4.8
‐0.1
3.5
6
0.1
0
5.9
0
3.8
7.3
0
3.8
7.4
0
4.3
3.1
0.2
3.4
4
0.4
2005 ‐3.4
3.8
9.5
0
4.1
3.7
0
3
‐1.5
0
2004 0.7
3.8
27.4
0
4.1
2.7
0
3
6
1
2003 0
3.8
18.2
‐0.8
4.1
4.2
0.1
2
5.5
2
2002 3.5
4.6
3.8
4.6
4
3.1
2
0
6.2
0
2001 ‐2.3
0
‐10
0
2
‐0.3
0
0
5
0
2000 2.3
0
1.6
0
2
‐1.2
0
0
5.4
1995 0
1990 0
3.9
4.5
‐0.1
0
2.3
0
1.2
9
Pace of Relaxation of Foreign Exchange Controls
Trinidad & Tobago International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Tunisia International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Turkey International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Uganda International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
United Arab Emirates International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Uruguay International Capital Markets Control Index GDP 1980 1985 0
0
10.4
0
‐4.1
0
0
7.4
0
‐3.4
0
‐3
0
10
‐1.8
5
‐2.5
‐5
10
6
0
6.5
0
5
23.6
0
10
1.5
0
11.3
0
5
6.2
0
10
0.3
8.5
5.3
8.5
6.2
12.4
1.2
10
‐1.4
8.5
4.8
0
6.2
1.7
0
8.7
‐1.4
8.7
‐3.4
8
5.7
‐0.2
5.5
11.9
‐0.7
8.2
6.7
0.2
5.7
9.7
0.2
7.6
2.2
4
7.4
‐0.2
7.3
‐11
4.2
8.9
0.2
8.2
4.4
0.2
6.2
2.6
0
4.1
4
0.2
3.9
6
‐0.2
4
5.8
‐0.3
8
6.9
‐0.5
7.1
8
0.1
7
8.8
0.2
4.1
5.6
0.1
4.3
7.9
‐1.5
2005 0
6.8
14.4
0.1
4
1.7
3.2
5.8
‐7.5
0
2004 0
6.7
7.9
‐0.8
0.8
5
0
5.8
7.4
0.3
2003 0
7.5
4.2
0
0.8
4.7
‐1.2
5.5
7.2
5.5
2002 0
7.5
6.9
‐0.5
2
2.4
0
0
9.3
0
2001 0
8
4
8
2
7.1
2
0
4.3
0
2000 0
0
1.5
0
0
5.7
0
0
‐0.8
1995 0
1990 0
6.4
8.2
0.7
7.4
11.8
7.6
6.6
10
1980 Pace of Relaxation of Foreign Exchange Controls
Venezuela International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Zambia International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
Zimbabwe International Capital Markets Control Index GDP Pace of Relaxation of Foreign Exchange Controls
1985 0
8
‐1.9
5
0.2
‐3
2
3.9
1990 0
5
6.5
0
2
1.2
0
2
10.7
2000 ‐1.3
6.9
4
1.9
2
‐0.6
0
2
7
1995 0
8.1
3.7
1.2
2
‐2.8
0
2
7
2001 0
7.8
3.4
‐0.3
9.2
3.6
7.2
3.5
0.2
2002 ‐1.4
4.5
‐8.9
‐3.3
9.2
4.9
0
2.5
‐7.3
2004 ‐0.2
5.5
‐7.8
1
8.4
3.3
‐0.8
2.5
‐2.7
2003 0.3
5.5
18.3
0
8.5
5.1
0.1
2005 0.2
5.2
10.3
‐0.3
9.3
5.4
0.8
8.7
5.2
‐0.6
0
1.5
‐1 0
2
2.3
2.4
2
‐4.4
‐10.4
‐3.8
‐5.3
‐0.5
0.3
0.1
‐0.4
11
Appendix B: Correlation of relaxation of capital controls and economic growth
for individual emerging economies
Countries
R
R2
R2*100
Algeria
0.6095
0.371488119
37.14881192
Argentina
0.0422
0.001781281
0.178128147
Bahamas
-0.3571
0.127541215
12.75412154
Belize
-0.3327
0.110700335
11.07003348
Benin
-0.5638
0.317823641
31.78236415
Bolivia
0.31849
0.101437852
10.14378516
Botswana
-0.3871
0.149814187
14.9814187
Brazil
-0.1546
0.023891938
2.389193846
Burundi
Cameroon
Central African Republic
-0.0504
-
0.002537736
-
0.253773553
-
Chad
0.6991
0.488745155
48.87451547
Chile
0.13427
0.018028067
1.802806666
China
-0.1826
0.033336774
3.333677429
Colombia
0.06582
0.004332334
0.43323339
Congo, Democratic Republic of
-0.1753
0.030746331
3.074633129
Congo, Republic of
-
-
-
Costa Rica
0.38958
0.151774574
15.17745744
Côte d’Ivoire
0.07621
0.005808252
0.580825224
0.3394
0.115190169
11.51901689
Ecuador
0.23029
0.053031449
5.30314491
Egypt
-0.0527
0.002775553
0.277555321
El Salvador
0.34104
0.11631058
11.63105799
Dominican Republic
Countries
R
R2
R2*100
Ethiopia
0.33048
0.109219301
10.92193008
Fiji
-0.4745
0.225166086
22.51660864
Gabon
-
Ghana
0.55243
0.305184003
30.51840033
-0.051
0.002599728
0.259972809
-0.3928
0.154264285
15.42642849
0.6444
0.415245551
41.52455507
Hungary
0.85678
0.734064807
73.40648066
India
0.57323
0.328596166
32.85961659
Indonesia
-0.2241
0.05020505
5.020504988
Guinea-Bissau
Haiti
Honduras
Iran
-
-
-
-
-
Jamaica
0.24202
0.058573932
5.857393201
Kenya
0.09281
9.281462136
9.281462136
Madagascar
0.04896
0.002397011
0.239701102
Malawi
0.21655
0.04689521
4.689521011
Malaysia
0.32004
0.102428589
10.24285892
Mali
0.01197
0.000143239
0.014323872
Mauritius
-0.4202
0.176594006
17.65940057
Mexico
-0.6063
0.367652151
36.76521508
0.496
0.246018271
24.60182712
Nicaragua
Niger
-
-
-
Nigeria
-0.2451
0.06008098
6.00809796
Pakistan
0.31636
0.100085709
10.00857092
Panama
-0.7214
0.520349985
52.03499845
Paraguay
-0.2132
0.045473904
4.547390427
0.3336
0.111286895
11.12868947
0.31158
0.09708103
9.708103039
Peru
Philippines
1
Countries
R
R2
R2*100
Russia
0.00267
7.11359E-06
0.000711359
Rwanda
-0.1704
0.029019687
2.901968652
Senegal
0.32327
0.104506128
10.45061284
Sierra Leone
0.71529
0.511637614
51.16376143
South Africa
0.4168
0.173718254
17.37182541
Sri Lanka
-0.1842
0.033921883
3.392188312
Syria
-0.3567
0.127202899
12.7202899
Thailand
-0.2199
0.048343957
4.834395682
Togo
-
-
-
Trinidad & Tobago
0.43797
0.191821586
19.18215855
Tunisia
-0.3925
0.154034146
15.40341456
Turkey
-0.0392
0.001534182
0.153418249
Uganda
0.31607
0.099902054
9.990205422
United Arab Emirates
-0.4373
0.19126247
19.12624695
Uruguay
-0.0244
0.000596597
0.059659677
Venezuela
0.02626
0.000689651
0.068965107
Zambia
0.77412
0.599260372
59.9260372
Zimbabwe
-0.2203
0.04854326
4.854326017
2
Appendix C: Correlation of the pace of relaxation of capital controls and
economic growth for individual emerging economies
Countries
R
R2
R2*100
0.091007709
0.00828
0.828240304
Argentina
-0.164070022
0.02692
2.691897225
Bahamas
-0.049903917
0.00249
0.24904009
Belize
-0.581693124
0.33837
33.83668904
Benin
-0.318183954
0.10124
10.12410284
Bolivia
0.203577938
0.04144
4.144397671
Botswana
0.644481125
0.41536
41.53559205
Brazil
0.163637106
0.02678
2.677710241
-
-
-
0.131855746
0.01739
1.738593776
-
-
-
Algeria
Burundi
Cameroon
Central African Republic
Chad
0.043573107
0.0019
0.189861566
Chile
0.637495889
0.4064
40.64010084
China
-0.210337002
0.04424
4.424165457
0.525160897
0.27579
27.5793968
-0.599169742
0.359
35.90043795
Colombia
Congo, Democratic Republic of
Congo, Republic of
-
-
-
Costa Rica
-0.35355251
0.125
12.4999377
Côte d’Ivoire
0.134853406
0.01819
1.818544102
Dominican Republic
0.427202036
0.1825
18.25015793
3
Countries
R
R2
R2*100
-0.426126338
0.18158
18.15836556
Egypt
0.132045834
0.01744
1.743610226
El Salvador
0.407926752
0.1664
16.64042351
Ethiopia
0.334904769
0.11216
11.21612041
-0.159304673
0.02538
2.537797882
Gabon
-
-
-
Ghana
-0.513493391
0.26368
26.3675463
Guinea-Bissau
-0.188643968
0.03559
3.558654679
Haiti
0.183475433
0.03366
3.366323448
Honduras
0.335649556
0.11266
11.26606241
-0.003672442
1.3E-05
0.001348683
India
0.064469383
0.00416
0.415630129
Indonesia
0.693790903
0.48135
48.13458176
-
-
-
-0.108296259
0.01173
1.172807963
0.240953873
0.05806
5.805876877
Madagascar
-0.323375753
0.10457
10.45718775
Malawi
-0.041747683
0.00174
0.174286901
Malaysia
-0.094386235
0.00891
0.890876129
Mali
-0.04949979
0.00245
0.245022921
Mauritius
0.167586854
0.02809
2.808535356
-0.2218096
0.0492
4.919949857
0.480045983
0.23044
23.04441458
-
-
-
Ecuador
Fiji
Hungary
Iran
Jamaica
Kenya
Mexico
Nicaragua
Niger
4
Countries
R
R2
Nigeria
-0.102030171
0.01041
1.04101558
Pakistan
-0.282986638
0.08008
8.008143705
Panama
-0.170886542
0.0292
2.920221032
Paraguay
0.746238714
0.55687
55.68722181
Peru
0.455790683
0.20775
20.77451466
Philippines
-0.00193325
3.7E-06
0.000373746
Russia
-0.953674223
0.90949
90.94945236
Rwanda
-0.148127138
0.02194
2.194164907
Senegal
-0.43346709
0.18789
18.7893718
Sierra Leone
-0.148723632
0.02212
2.211871876
South Africa
-0.007554416
5.7E-05
0.005706921
0.190895547
0.03644
3.644110971
-0.245738647
0.06039
6.038748287
0.39187128
0.15356
15.35631003
-
-
-
Trinidad & Tobago
-0.127955023
0.01637
1.637248804
Tunisia
-0.276516491
0.07646
7.64613696
Turkey
0.073950312
0.00547
0.546864857
Uganda
-0.018732522
0.00035
0.035090737
0.5125703
0.26273
26.27283125
Uruguay
0.568311421
0.32298
32.29778711
Venezuela
0.318886841
0.10169
10.16888174
Zambia
0.106723376
0.01139
1.138987888
Zimbabwe
0.314560163
0.09895
9.894809623
Sri Lanka
Syria
Thailand
Togo
United Arab Emirates
R2*100
5
Fly UP