What are capital controls and why are they imposed?
Answer (1)
Capital Controls are government-imposed restrictions that limit the movement of money across a country’s borders. These controls are used to regulate or prevent massive inflows or outflows of foreign capital, which can affect a country’s economy and currency stability.Types of Capital ControlsInflow Controls - Limit foreign investments entering a country (to avoid inflation or overheating).Outflow Controls - Limit how much money citizens or investors can take out of the country (to prevent a currency crisis).Reasons for Imposing Capital ControlsTo protect the currency from sudden devaluationTo prevent capital flight during times of political or economic crisisTo preserve economic stabilityDuring the 1997 Asian Financial Crisis, many Asian countries like Malaysia and Thailand experienced huge outflows of capital, which led to currency collapses. In contrast, India had capital controls that prevented money from leaving too fast—helping protect their economy.While capital controls can stabilize an economy in the short term, they may scare off foreign investors who want to move their money freely. That’s why most countries only use them temporarily.
