Capital controls were used widely till the late 1970; this is because it helps to prevent free

flow of funds between countries. A cautious leisure of these controls had proven the
consistent with greater economic integration between advanced countries and strengthened
the case for capital market opening more normally. Capital controls emerged to be done as a
serious policy tool for comparatively open economies by early 1990s (Bhagwati 1998). As a
result of the Asian Crisis, the capital controls are being reassessed. The current experience in
Malaysia with the consideration of capital controls in September 1998 has been the central to
two main views on capital control. The well known view pays attention on macroeconomics.
When a country encounters serious external crisis, in which causes pure panic above all, and
if conventional macroeconomic policies have failed to reinstate confidence, imposing capital
controls would be an effective way to stabilize the economy (Krugman 1998).
It is not easy to distinguish the effects of capital controls from other contemporary factors.
The costs or benefits of capital controls remain unclear. Malaysia had more positive preconditions, it did not do considerably better, and the timing of controls agree with the reversal
of the yen appreciation, the end of the crisis elsewhere, and Fed rate cuts which put an end to
the crisis in world markets. However, because the costs are unclear, there is no evidence that
the institution of capital controls or the failure to apply an explicit IMF program has yet
resulted in any obvious detrimental effects. (Dornbusch,R 2001) . The immediate but shortlived decline in credit ratings and spreads, it would be great to point the post crisis decline in
foreign investment and activity in financial markets exclusively to capital controls. In
addition, the Malaysian authorities have taken steps to reduce the costs of controls, so that in
their strongest form capital controls were effectively in place for less than six months.

There are many countries that resorted to capital controls, thus include the industrial
countries. While facing difficulties in achieving domestic and external balance in post-war
years, countries like United States, Germany, and Switzerland had imposed capital control.
For example, in the defence of a number of European currencies occur from the result of
market trouble within the exchange rate mechanism of the EU (European Union), capital
control took control.
the immediate but short-lived decline in credit ratings and spreads, it would be unbelievable
to point the post crisis decline in foreign investment and activity in financial markets
exclusively to capital controls. in addition, the Malaysian authorities have taken steps to
reduce the costs of controls, so that in their strongest form capital controls were effectively in
place for less than six months.
In Malaysia, the corrective approaches have reinforced the external payment position
significantly. The major development in the current account has already taken place. Based
on the conservative assumptions, the estimated current account balance in 1998 is RM 20.1
billion (7.7% of GNP) and in 1999, RM11 billion (4.2% of GNP). In general, Malaysia has
not experienced important capital outflows of the type and size experienced by other
countries opposite balance of payments and reserves constraints. In both private and public
sectors, the capital outflows are in form of prepayments of external loans and the investment

in the course of action abroad with possible to give away spin-off payback for the domestic
economy. Thus, include the liquidation of investments by portfolio investors. The outflow of
the portfolio investments has mostly been taken place while the forceful programme of
prepayment of external loans and overseas investment been put on hold to ease damage on
the reserves position, while the external reserves are increasing and unbroken.
Furthermore, in cycle with imposing capital controls, Malaysia pegged the ringgit to the U.S.
dollar at rate in which many analysts believed the ringgit was undervalued. The
undervaluation made capital controls largely laid off. It became necessary not to sustain the
exchange rate regime, regardless of an aggressive monetary and fiscal expansion, which was
largely led by exports. And since they were imposed after a substantial amount of capital had
already left Malaysia, controls were not tested by any significant pressures for capital
outflows either.
International reserves increased at US$22.6 billion in October 1998 while the increase of
US$2.4 billion from the end-August level which is sufficient to finance 4.3 months of
imports.
Growth in reserves would offer better confidence. Compared to the foreign exchange
reserve, the short term debt is half the size. These means Malaysia is not exceedingly
vulnerable to credit outflows during the short term, and Malaysia's external debt
approximately 56% remained maturity which exceeds four years. Inflationary bias caused
inappropriate mix of macroeconomic policies that include the monetary policies and the
exchange rate led the countries to fail in achieving the desired objectives using capital
control. Moreover, these countries had payment regimes and trades that were protectionist in
nature or where public spending had been diverted to less productive sectors, for example the
military expenditure. As a result, the supplies are restricted and prices of goods and services
rises.
Malaysian selective exchange controls have a greater chance of success because the situations
and circumstances are in favour. Malaysia is not replacing controls for proper
macroeconomic policies. Controls are to give space to obtain complete adjustment policies in
surroundings of stability in the financial markets. The structural adjustments are in progress
to make sure that macroeconomic fundamentals remain strong in the medium term. In
general, the introduction of the current capital control measures will keep our economy from
the instabilities of foreign currency speculation and short-term capital flows. In addition,
create environment which is favourable for revitalization in consumer confidence and
investors.
As a conclusion the macroeconomic effects of different types of capital controls, focusing on
Malaysias experiences in the 1990s. The pattern of Malaysias capital account regulations
was complicated, keeping a varied array of international financial transactions and evolving
in a complex manner over time.

References

Dornbush, R, 2001, Malaysia, was it different?, viewed 13th April 2015,

<http://papers.ssrn.com/sol3/papers.cfm?abstract_id=273693>
Johnson, S, Kalpana, K, Malaysian Capital Control: Macroeconomics and Institution, IMF
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Kawai, M, & Shinji, T, 2003, Rethinking Capital control: the Malaysian experience, viewed
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