Post-Crisis Capital Account Regulation
in South Korea and South Africa
Brittany A. Baumann and Kevin P. Gallagher
PERI Working Paper No.
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In the wake of the recent financial crisis, South Korea and South Africa both experienced a mass influx of 'hot' money from industrialized countries. These capital inflows triggered significant exchange rate appreciation and worries of asset bubbles. South Korea responded by devising new regulations on foreign exchange derivatives and applied more traditional capital controls. South Africa liberalized outflow controls in order to reduce net inflows. We econometrically test for the effectiveness of these measures and find some evidence that both countries' measures were successful in lessening the appreciation and volatility of their currencies. Such measures were less successful, however, in stemming asset bubbles. These findings suggest that emerging market and developing countries can make the policy space to regulate cross-border financial flows. However, it should not be left to emerging market and developing countries to carry the burden. Industrialized countries should also steer credit toward productive use so as not to create negative spillovers to the developing world.
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See a blog post on this topic:
The Political Economy of Managing Capital Flows in South Korea and South Africa, Kevin P. Gallagher, GDAE Globalization Commentary, from Triple Crisis Blog, April 5, 2013
Read more on GDAE’s work on capital flows.
The Global Development and Environment Institute’s Globalization and Sustainable Development Program examines the economic, social and environmental impacts of economic integration in developing countries, with a particular emphasis on the WTO and NAFTA's lessons for trade and development policy. The goal of the program is to identify policies and international agreements that foster sustainable development.