After an eleven-year course on currency exchange controls, it’s time to take our final exam boys and girls. The test has a single question: what have we learnt about currency exchange controls? Is it that …
- they are ineffective at stemming capital flight;
- they create huge distortions;
- they usually lead to an overvalued currency;
- they are a breeding ground of corruption;
- they are incredibly painful to dismantle;
- all of the above.
As you can see, I’ve made this easy for you.
Exchange controls have been pretty much the norm in Venezuela ever since oil wealth struck the country – perhaps even before then, but you’d have to ask a historian about that. Aside from a few experiments in the last few years, the currency market has never been allowed to work.
Isn’t it time we convinced ourselves that they are simply bad policy? Together with the policy of giving away gas for free, they constitute the dynamic duo – policies that are, simultaneously, overwhelmingly frequent and dramatically mistaken.
I understand the reasons why someone might think a currency control is a good idea. Capital flight is a scary thing, so the temptation to stem it by, well, simply stemming it is always enticing. The problem is that capital flight shouldn’t be so scary.
Capital flight is usually a sign of a disease, not a problem in and of itself. When capital flight occurs, it’s because something is wrong in your economy, and imposing currency controls is not the way to fix it. Furthermore, when capital flight occurs, you prevent the pricing mechanism from working, and you impede the valuable reallocation of resources across the economy.
Say, for example, oil prices take a prolongued hit. With currency controls, you prevent society from internalizing this shock. If the market were to function, society would shift to producing things we could export and that the world can now afford. Local consumers would shift away from expensive imported goods and start buying locally. Gradually, society would adjust.
But adjustment is a scary thing for a politician. It´s always more tempting to force the issue, to “control,” to “assert” some non-existent power and appear to be doing something. Control de cambios has become such a regular phrase in our public sphere, I doubt people in other Latin American countries even know what it means. It’s become the poison pill of our policymakers.
Now, I am obviously not arguing for a “clean” currency market. Countries can and do intervene in currency markets all the time, and that’s a good thing. The market is simply too risky, and it’s not efficient to transfer all of that risk to households. So yes, some intervention is in order.
But currency exchange controls, with its discrete rules and its black markets, always transmogrify into a corrupt system that benefits a few. They always overstay their welcome.
The other problem with currency exchange controls is that they always lead to a severly overvalued currency. Have we ever had a time when a currency control has been in place and this has lead to an under-valued bolívar? (Crickets chirping)
We’ve had currency controls forever. Its time to stop and go cold turkey. The only way to show real commitment toward this is to pass a Constitutional Amendment banning them. I hope some politician with a vision proposes this, for the sake of our embattered country.