London, 1979: a newly appointed conservative prime minister concerned with the worsening performance of British industrial exporters, needs to make tough and swift decisions.
Ideologically charged by the likes of FA Hayek and Milton Friedman, Margaret Thatcher wished to liberate the individual -- and thought the government should not stand in the way.
She did not have all the data in hand, nor a sense of the policy implications of abolishing capital exchange controls that had existed in the United Kingdom since the end of the First World War. But she did it anyway -- guided by ideology rather than empirical analysis.
Exchange control abolition constituted a strategy to depreciate the sterling and boost export competitiveness. Whether you like her or not, the policies of Thatcher turbo-charged the UK economy from the sick man of Europe to the financial powerhouse it is today.
Third world thinking
Capital controls are now mostly forgotten in the developed world, and are solely reserved for "baby" nations.
Developing nations prefer controls to protect themselves from shocks and volatility, i.e. it stops citizens from relocating their assets when times are bad, and shields an economy from the volatility of neighbouring economies.
It also allows for governments to strictly manage a country's trade balance, goods inflow, and helps to maintain a stable exchange rate whilst it focuses on building its industries and institutions.
Then there’s the issue of capital flight. There are four sub-categories of capital flight:
1) Stealing money and sending it abroad
2) People wishing to sell their ancestral land and the general relocation of capital proceeds abroad
3) Businesses that require money abroad to bypass the LC system for foreign procurement and spot purchases
4) Businesses over- and under-invoicing to bypass customs duty
Except for the first one, if capital controls remained open, the other categories would take money out after paying due taxes rather than using the hawala mechanism.
There is a current limit of $12,000 which we are allowed to spend abroad. This policy ensures that the average person is forced into participating in money laundering, or a businessman for his foreign marketing and development purposes -- there are no legal means to extend this amount unless you’re an exporter.
Increasing this limit would also dampen the kerb market for foreign exchange and probably get rid of it totally.
We are also one of two countries that require mandatory letters of credits from a bank, something so outdated for developed nations that the only other country that requires it is Pakistan.
The underlying principle for such controls is one of economic fallacy -- that trade is a zero sum game. That investment kept inside the country is good -- and that investment that leaves a country is bad.
Historically, it has never worked for developing nations in the long run. Opening up capital controls works similarly to free trade -- the easier the better.
It propels rapid growth and competition in a market whilst avoiding inflationary triggers persistent in our current system.
Running the numbers
There are many studies and indexes on tracking a nation's growth in relation to how stringent their capital controls are.
The Chinn-Ito Index analyses data sets of 182 countries since the 1970s. Bottom line: it is crystal clear that there is a direct correlation between loosening capital exchange controls and a nation's growth.
The index demonstrates that liberalizing capital controls always leads to the long-run sustainable growth of a nation.
If you sort countries based on openness -- almost all the countries below us in the openness index have lower per capita GDP and development than us
Other studies analyzed Malaysia during the Asian financial crisis in 1998. Malaysia remained the only country to adopt stringent capital exchange controls in midst of the crisis which resulted in slow growth and tyrannical rule compared to other nations within the crisis. The controls were used as a shield for the corrupt government that denied people economic liberty -- and were quickly repealed in 2001.
Even the IMF and other economic bodies consider capital controls to be a thing of the past and not suited to the needs of globalization.
With much of the empirical data against such measures, the question can be asked: Why do they still exist in Bangladesh?
Protectionism and managing financial crises are often touted as the primary reasons for keeping stringent controls. But who gains from it?
Volatility still persists regardless of controls, and we are losing out on the benefits of a liberalized system: more FDI, more financial freedom for our citizens, ease of doing business, and a dynamic and sustainable economy.
Way forward
My humble suggestion would be to loosen controls, let the dollar float in our current accounts, adopt a semi-open strategy like India where capital can be relocated after paying taxes in full, and let’s get rid of letters of credit. These controls only benefit a select few.
In the long run, this is the only way to ensure a dynamic and secure future for Bangladesh, where a select few experts are not in charge of an entire nation's in-flow and out-flow of goods, services, and currency.
It is simply not possible to plan international trade centrally -- no matter how smart or adept or well-meaning you might be -- and we need to gently remove the government's hand from this sector.
Bangladesh also needs to address the true causes of financial uncertainty.
Let’s first fix our unsound banking system by opening it up to foreign competition, create a truly independent central bank, and move away from controlled exchange rates by floating the taka against the dollar.
Just like adopting free trade allowed for booms around the world, money also needs to move freely.
Regardless of empirical analysis, it boils down to ideology: like Thatcher, do we believe in liberating our fellow man -- allowing him to enjoy the fruits of his labour, however he pleases?
Only ideology can push these drastic policy changes into fruition.
And I believe the time has come for our government to be able to take the bold ideological steps that are necessary.
Namir Ahmad is associated with Making Our Economy Right (MOER), a free market think-tank.
