The Malaysian Capital Control Regime of 1998: Implementation, Effectiveness, and Lessons

Abstract

Hailed as a “development success story” among the second-tier newly industrializing economies of Southeast Asia, Malaysia’s remarkable economic performance has been attributed to a pro-market, outward-oriented development strategy. However, in the midst of the Asian financial crisis of 1997- 1999, the Malaysian government, in a dramatic move, broke away from the prevailing policy consensus and adopted the use of capital controls to correct what it perceived to be financial market imperfections responsible for the crisis. Why did Malaysia opt for a strategy considered by many to be heretical? What kinds of capital controls did Malaysia institute and what was their overall effectiveness? Was Malaysia’s remarkable economic recovery due to its imposition of capital controls? And what broad lessons can be derived from Malaysia’s experience? This article addresses these questions.