Loose talk spooks the markets
Recent talk about imposing exchange controls to halt the slide in the value of the rupee created some alarm in the markets and business circles. Although the government denied it was contemplating such a move, mere talk of it and the fact that sections of the government had reportedly discussed it, had a negative effect on the market and on business confidence.

It is well known that in the modern economy, where the market has been glorified and elevated to an almost exalted status and with the reigning ideology emphasising free trade, any hint of controls could spook the traders who dominate such markets.

Thus talk of exchange control would have added further pressure on the weakening rupee when the motive would have been exactly the opposite. It is the uncertainty that disrupts the smooth workings of the market - although there are many who take advantage of such uncertainty and make money on the movements generated by that uncertainty.

But markets are not perfect and even in the most developed countries there are, or have been at a time when they were yet to reach such developed status, controls designed to ensure markets operate in an equitable and fair manner and that there are no undue movements that could be disruptive and harm the larger economy. Even advanced European countries removed capital controls only in the 1970s.

In fact, many markets are thoroughly distorted although this may not be obvious to the public who are led to believe by assorted financial experts and gurus and foreign lending institutions that markets are indeed perfect mechanisms for regulating demand and supply.

Such distortions are particularly acute in small markets such as ours. For instance, in the Colombo bourse there is a belief in certain quarters that the market could be manipulated by a few players with deep pockets.

A good example of the double standards of those who promote free trade and free market economics is the manner in which the industrialised West, led by countries like the US, UK, Japan and the EU are trying to stuff free market reforms down the throats of poor countries - forcing them to open up their markets while they themselves operate the most protected markets in the world.

Controls on foreign exchange flows are not new nor are they unusual. In fact during the East Asian financial crisis that rocked the 'Tiger' economies in the late 1990s, countries which did not impose controls on foreign exchange flows in accordance with the advice of multilateral lending institutions, suffered the most and took longer to recover.

At that time controls seemed the most obvious way to stem the outflow of dollars. Such 'hot money' movements could easily destabilise developing economies. Some controls are therefore necessary especially when much of the world's foreign exchange trading is of a purely speculative nature.

The few who did impose or maintained controls, such as China and Malaysia, were able to limit the damage from the crisis and recovered faster than the other East Asian NICs. Any country would be justified in introducing exchange controls if it is in their national interest and to prevent grave harm to the economy.

Controls do have negative consequences - they can distort the operation of markets, make economies inefficient, are difficult to administer and often lead to corruption and the creation of black markets.

We may not have reached a crisis as grave as that faced by East Asian countries in the late 1990s but the government would do well to keep in mind that loose talk of exchange controls could be very damaging.

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