The Malaysian Capital Controls: A Success Story?

This paper contributes to the debate on the use of temporary controls on capital outflows as a crisis resolution measure by examining the outcome of Malaysia's radical response to the 1997-98 financial crisis. The analysis suggests that carefully designed temporary capital controls were successful in providing Malaysian policymakers a viable setting for aiding the recovery process through the standard Keynesian therapy. Capital controls also assisted banking and corporate restructuring by facilitating the mobilization of domestic resources, and more importantly, by providing a cushion against possible adverse impacts on market sentiment of "national"initiatives. Of course other countries should be cautious in deriving policy lessons from Malaysia because a number of factors specific to Malaysia seem to have significantly conditioned the outcome of the capital-control based recovery package.