Exchange Controls and SADC Regional Integration: Measuring SADC Restrictiveness

Ellyne, Mark and Chater, Rachel (2013): Exchange Controls and SADC Regional Integration: Measuring SADC Restrictiveness.

Abstract

This paper addresses the issue of foreign exchange and capital controls in the context of the Southern African Development Community’s goal of regional integration. It reviews the theory and evidence surrounding current and capital account liberalisation and argues that there is a lack of sufficiently refined de jure measures of capital account openness. A new index for measuring exchange control restrictiveness is created based on data from the International Monetary Fund’s Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER) for the 15 SADC member states. It identifies substantial variation in the exchange control regulations across SADC countries that other existing, more indices fail to account for. The new index illustrates the considerable range of variation of exchange restrictiveness within SADC, as well as illustrating SADC’s relative exchange restrictiveness compared with other countries, inside and outside of Africa. The new index also correlates with several measures of financial development, certain balance of payment items, and some measures of institutional development, which makes it a useful measure for SADC integration. The paper highlights the challenges for SADC monetary union in the sphere of exchange control.

• Item Type: MPRA Paper
• Language: English
• Keywords: Exchange controls, SADC, capital controls, regional integration
• Subjects: F - International Economics > F1 - Trade > F19 - Other; F - International Economics > F5 - International Relations, National Security, and International Political Economy > F55 - International Institutional Arrangements

References

ARTETE, C.; EICHENGREEN, B. and WYPLOSZ, C. (2001). When does capital account liberalisation help more than it hurts? National Bureau of Economic Research, WP8414.

ALFARO, L.; CHANDA, A.; KALEMLI-OZCAN, S. and SAYEK, S. (2004). FDI and economic growth: the role of local financial markets. Journal of International Economics, 64: 89–112.

AIZMAN-SAINI, W. N. W.; LAW, S. H. and AHMAD, A. H. (2010). FDI and economic growth: New evidence on the role of financial markets. Economic Letters, 107: 211-213.

AIZENMAN, J., Chinn, M., and Ito, H. (2008). Assessing the Emerging Financial Architecture MJeasuring the Trilemma’s Configuration over Time. National Bureau of Economic Research, WP14533.

BARTOLINI, L. and DRAZEN, A. (1996). Capital account liberalisation as a signal. National Bureau of Economic Research, WP5725.

BELLE, M. (2010). Regional Integration in SADC: Progress, Prospects and Statistical Issues for Monetary Union. Proceedings of the SARB/IFC Seminar on “Economic and Financial Convergence en Route to Regional Economic Integration: Experience, Prospects and Statistical Issues amidst Global Financial Turmoil”. Durban, South Africa: BIS: 85-95.

BEKAERT, G.; HARVEY, C. and LUNDBLAD, C. (2001). Does financial liberalisation spur growth? National Bureau of Economic Research, WP8245.

BINICI, M.; HUTCHISON, M. and SCHINDLER, M. (2010). Controlling capital? Legal restrictions and the asset composition of international financial flows. Journal of International Money and Finance, 29: 666-684.

BJERKSUND, P. and SCHJELDERUP, G. (1995). Capital controls and capital flight. Public Finance Analysis, 52(1): 33-42.

BUCH, C. M., DÖPKE, J. and PIERDZIOCH, C. (2005). Financial openness and business cycle volatility. Journal of International Money and Finance, 24(5): 744-765.

CÁRDENAS, M. and BARRERA, F. (1997). On the effectiveness of capital controls: The experience of Colombia during the 1990s. Journal of Development Economics, 54: 27-57.

CARDOSO, E. and GOLDFAJN, I. (1998). Capital flows to Brazil: the endogeniety of capital controls. Staff Papers – International Monetary Fund, 41(1): 161-202.

CHANDA, A. (2001). The influence of capital controls on long-run growth: Where and how much? Unpublished, Providence, Rhode Island: Brown University.

CHINN, M. D and ITO, H. (2008). A New Measure of Financial Openness. Journal of Comparative Policy Analysis 10(3): 307-320. DE MELLO, L. (1999). Foreign Direct Investment-led growth: evidence from time-series and panel data. Oxford Economic Papers, 51: 133-151.

DING, D. and JINJARAK, Y. (2012). Development thresholds, capital flows and financial turbulence. North American Journal of Economics and Finance, doi:10.1016/j.najef.2012.03.008.

DOOLEY, M. P. (1996). A survey of literature on controls over international capital transactions. Staff Papers – International Monetary Fund, 43(4): 639-687.

EASTERLY, W., ISLAM, R. and STIGLITZ, J. (2001). Shaken and stirred: explaining growth volatility. In Annual World Bank Conference on Development Economics, ed. Boris Pleskovic & Nicholas Stern, Washington: World Bank.

EDISON, H. J.; LEVINE, R.; RICCI, L. and SLØK, T. (2002). International financial integration and economic growth. National Bureau of Economic Research, WP9164.

EDISON, H. J.; KLEIN, M. W.; RICCI, L. and SLØK, T. (2002). Capital account liberalization and economic performance: survey and synthesis. National Bureau of Economic Research, WP9100.

EDWARDS, S. (1999). How successful are capital controls? Journal of Economic Perspectives, 13(4): 65–84.

EDWARDS, S. (2001). Capital mobility and economic performance: Are emerging economies different? National Bureau of Economic Research, WP8076.

EICHENGREEN, B. (2001). Capital account liberalisation: what do cross-country studies tell us? Unpublished, Berkeley, CA: University of California.

FISCHER, S. (2004). Capital account liberalisation and the role of the IMF. In S. Fischer (ed), IMF Essays from a Time of Crisis: The International Financial System, Stabilization, and Development. London: MIT Press, 115-134.

FORBES, K. J. (2006). How does capital account liberalisation affect growth? In IMF Economic Forum, Annual Research Conference, November 10. [Online] Transcript available at: http://www.imf.org/external/np/tr/2006/tr061110.htm.

GIBB, R. (1998). Southern Africa in transition: prospects and problems facing regional integration. The Journal of Modern African Studies, 36(2): 287-306.

GREENWOOD, J. and KIMBROUGH, K. P. (1987). An investigation in the theory of foreign exchange controls. The Canadian Journal of Economics, 20(2): 271-288.

GRILLI, V. and MILESI-FERRETTI, G. M. (1995). Economic effects and structural determinants of capital controls. Staff Papers – International Monetary Fund, 42(3): 517-551.

GWARTNEY, J. D., HAL, J. and LAWSON, R. (2010). 2010 Economic Freedom Dataset. Economic Freedom of the World: 2010 Annual Report. Economic Freedom Network. [Online] Available at: http://www.freetheworld.com/datasets_efw.html.

HENRY, P. B. (2006). Capital account liberalization: Theory, evidence, and speculation. National Bureau of Economic Research,WP12698.

INTERNATIONAL MONETARY FUND (IMF). (2000). Annual Report on Exchange Arrangements and Exchange Restrictions. Washington DC: International Monetary Fund.

IMF. (2005). Annual Report on Exchange Arrangements and Exchange Restrictions. Washington DC: International Monetary Fund.

IMF. (2010). Annual Report on Exchange Arrangements and Exchange Restrictions. Washington DC: International Monetary Fund.

IMF. (2011). Articles of Agreement of the International Monetary Fund (1944). Washington DC: International Monetary Fund.

IMF. (2012). Liberalising Capital Flows and Managing Outflows. Policy Paper 031312. Washington DC: International Monetary Fund

JEFFERIS, K. (2011). The status of exchange controls in SADC, and further liberalisation. Unpublished, prepared for SADC Secretariat: Gaborone.

JOHNSTON, R. B. and TAMIRISA, N. T. (1998). Why do countries use capital controls? IMF Working Paper, WP/98/181.

KAUFMANN, D.; KRAAY, A. and MASTRUZZI, M. (2010). The worldwide governance indicators: A summary of methodology, data and analytical issues. World Bank Policy Research, WP5439. [Online] Available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1682130.

KLEIN, M. W. (2005). Capital account liberalization, institutional quality and economic growth: theory and evidence. National Bureau of Economic Research,WP11112.

KLEIN, M.W. and OLIVEI, G. (2000). Capital Account Liberalisation, Financial Depth and Economic Growth. Unpublished, Boston, MA: Fletcher School of Law and Diplomacy, Tufts University.

KORINEK, A. (2011). The new economics of prudential capital controls: A research agenda. IMF Economic Review, 59: 523–561.

KOSE, A. and PRASAD, E. (2012). Capital accounts: liberalise or not? Finance and Development. [Online]. Available at: http://www.imf.org/external/pubs/ft/fandd/basics/capital.htm.

KRAAY, A. (1998). In search of the macroeconomic effects of capital account liberalisation. Unpublished, Washington DC: The World Bank.

KRUGMAN, P.R and OBSTFELD, M. (2009). International Economics: Theory and Policy, 8th ed. Boston: Pearson.

NEELY, C. J. (1999). An introduction to capital controls. Review, Federal Reserve Bank of St Louis, November/December: 13-30.

O’DONNELL, B. (2001). Financial Openness and Economic Performance. Unpublished; Dublin: Department of Economics, Trinity College.

ODHIAMBO, N. M. (2009). Interest rate liberalisation and economic growth in Zambia: A dynamic linkage. African Development Review, 21(3): 541-557.

OHLIN, B. (1937). Mechanisms and objectives of exchange control. The American Economic Review, 27(1): 141-150.

ORLOV, A. G. (2005). Pros and cons of capital controls in the presence of incomplete markets. The American Economist, 49(1): 79-93.

PRASAD, E. S.; ROGOFF, K.; WEI, S-J. and KOSE, M. A. (2003). Effects of financial globalization on developing countries: some empirical evidence. International Monetary Fund, Occasional Paper 220.

PRATI, A., SCHINDLER, M. and VALENZUELA, P. (2009). Who benefits from capital account liberalisation? Evidence from firm-level credit ratings data. IMF Working Paper, WP/09/210.

QUINN, D.P. (1997). The correlates of change in international financial regulation. American Political Science Review, 91(3): 531-551.

QUINN, D. P. and INCLAN, C. (1997). The origins of financial openness: A study of current and capital account liberalization. American Journal of Political Science, 41(3): 771-813.

RAZIN, A. and ROSE, A. K. (1994). Business-cycles volatility and openness: an exploratory cross-sectional analysis. In Capital Mobility: The Impact on Consumption, Investment and Growth, ed. By Leonardo Leiderman and Assaf Razin. Cambridge, England: Cambridge University Press: 48-76.

REISEN, H. and SOTO, M. (2001). Which type of capital inflows foster developing country growth? International Finance, 4(1):1-14.

RODRIK, D. (1998). Who needs capital account convertibility. In Per Kenen (ed) Should the IMF Pursue Capital Account Convertibility? Essays in international Finance, 207(May).

SADC SECRETARIAT. (2003a). Regional Indicative Strategic Development Plan. Gaborone: SADC. [Online] Available at: http://www.sadc.int/english/key-documents/regional-indicative-strategic-development-plan.

SADC SECRETARIAT. (2003b). Summary of the Regional Indicative Strategic Development Plan. Gaborone: SADC. [Online] Available at: http://www.sadc.int/english/key-documents/regional-indicative-strategic-development-plan.

SADC SECRETARIAT. (2010). Desk Assessment of the Regional Indicative Strategic Development Plan. Final report approved by SADC Council, November 2011. Gaborone: SADC.

SCHINDLER, M. (2009). Measuring financial integration: A new data set. IMF Staff Papers, 56(1): 222-238.

STOCKMAN, A. C. and HERNANDEZ, A. D. (1985). Exchange controls, capital controls and international financial markets. National Bureau of Economic Research, WP1755: 1-31.

TAMIRISA, N. (1999). Exchange and capital controls as barriers to trade. International Monetary Fund Staff Papers, 46(1): 69-88.

TAVLAS, G.S. (2008). The benefits and costs of monetary union in South Africa. Bank of Greece Economic Research Department, WP70: 1-54.

TOBIN, J. (1978). A Proposal for International Monetary Reform. Eastern Economic Journal 4: 153-159.

TRANSPARENCY INTERNATIONAL. (2011). Corruption Perceptions Index 2011. [Online] Available at: http://cpi.transparency.org/cpi2011/results/.

WORLD BANK. (2010). African Development Indicators 2010. [Online] Available at: http://data.worldbank.org/data-catalog/africa-development-indicators.

WORLD BANK. (2011). World Development Indicators 2011. [Online] Available at: http://data.worldbank.org/data-catalog/world-development-indicators.