The impact of foreign exchange controls on the economic performance of emerging economies and South Africa in particular

Abstract

Capital controls relaxation is one critical macroeconomic policy component that constitutes the broader framework of economic reform policies. Research work has been done, especially on developed countries, to establish if relaxation of capital controls does improve economic performance of a country. The literature reviewed supports this notion but the results from causal studies lack consistency, especially when studying the emerging economies. This research reviewed the literature on the impact of capital account liberalization and the pace thereof on economic growth of emerging economies. Then, a quantitative research methodology was followed whereby 67 emerging economies, geographically grouped into five continents, were studied over a period of 25 years, 1980 to 2005. The economic growth rate was traced as the emerging economies relaxed or tightened their capital controls to establish if there was any kind of relationship. It was statistically proven that in emerging economies relaxation of capital controls had a significantly low impact on economic growth and that a gradual relaxation approach positively impacted economic performance.