CAPITAL CONTROLS :M UD IN THE WHEELS OF MARKET EFFICIENCY

In the early and mid-1990s, most economists and policymakers supported rapid capital account liberalization for emerging markets. Liberalization was expected to have widespread benefits. It was pre-dicted to increase capital inflows, thereby financing investment and raising growth. Capital inflows—especially in the form of direct in-vestment—would provide improved technology and management techniques, as well as access to international networks, all of which would further increase productivity and growth. Liberalization could facilitate the diversification of risk, thereby reducing volatility in con-sumption and income. It could also increase market discipline, thereby leading to a more efficient allocation of capital and higher productivity growth. Many countries followed this advice and re-moved their capital account restrictions. The initial results were generally positive—increased capital in-flows, investment booms, and impressive growth performance. But then a series of financial crises affected several emerging markets that had recently removed capital account restrictions, such as Mexico,