|Join Team CCS Support us Site Search|
|Currency Controls: The Perennial Folly
Let us see how with the example of controls put on foreign exchange transactions.
These are put into effect to conserve valuable foreign exchange resources of the nation and to use them for only what the government decides people should have. The intention is to build up foreign currency reserves and to prevent valuable dollars from being used up in buying consumer luxuries. The unintended effect is that countries with foreign exchange controls find it most difficult to build reserves and face perpetual foreign exchange crises. That only convinces people that more controls are needed.
India is one example. In late 80s just before Manmohan Singh liberalized the economy, India faced such a severe foreign exchange shortage that it had to virtually ban most imports. To buy its most essential import, oil, it had to send its gold reserves to London. Controls have been substantially eased and magically Indias foreign exchange reserves today stand at over US$ 60 billion.
India offers a valuable lesson. Foreign exchange reserves started to grow the moment restrictions were eased and they continued their climb with every relaxation. Countries without any controls be it Singapore, Hong Kong or Taiwan all have reserves in excess of US$ 100 billion each.
Why does this happen? Very simple. People want to park their capital where they have control. If from Hong Kong you can take your money to wherever you want at a click of a computer mouse and in Nepal you will be subjected to endless regulations, it doesnt take a genius to guess where you will keep your surplus cash.
In economics we learn that incentives matter. People have the incentive to keep their cash in Switzerland, Singapore, Hong Kong or other places where they have control over it and none to keep it in Nepal or India where government exercises control.
Complete lifting of all currency controls would probably be one of the most beneficial steps towards economic freedom that Nepal can take today. Would there then be a danger of the country running out of dollars? No, free markets would see to that. The markets would constantly adjust the value of the rupee according to its demand and supply at every moment. The rate is fixed in a manner where demand and supply exactly match.
Nobel Prize winning economist Milton Friedman states in his international best seller "Free to Choose"
"If foreign exchange rates are determined in a free market, they will settle at whatever level will clear the market. In the real world, as well as in that hypothetic world, there can be no balance of payments problem so long as the price of the dollar in terms of yen or the mark or the franc is determined in a free market by voluntary transactions."
It is not the governments job to give us foreign exchange any more than it is its job to provide a newspaper for everyone who wants to exercise his right of free speech. Importers buy foreign exchange in the free markets, exporters sell it. In free markets, there may be many other players, both sellers and buyers. It is the combined action of all of them which sets the price and constantly adjusts; there are no shortages or excesses.
What about foreign exchange crises faced by Indonesia, Argentina and many others countries? In each case the crises can be traced to government intervention. Crony capitalism with huge amounts of foreign exchange being used to fund projects of the relatives of its President with government granted monopoly privileges was Indonesias undoing. In Latin America the problem generally has been excess foreign exchange debt taken on by the government. Without these government caused problems, freedom from currency controls have never caused a problem and freedom never will.
Nepal can well follow what West Germany did after World War II when Ludgwig Erhard was its Minister of Economics. Erhard lifted all controls on prices and its currency. Within days the West German stores were full of goods. The German miracle had begun - with its powerful Detuche Mark regarded (until the recent emergence of the Euro) as the most powerful of Europes currencies. Let Nepal remove all controls on currency and trade and we will see the beginning of a Nepalese miracle much the same as the world saw the West German one 54 years ago.