Although restrictions on capital outflows may seem attractive, they suffer from
several problems. Evidence suggests that capital outflows may further increase after
the controls are implemented, because confidence in the government is weakened.
Also, restrictions on capital outflows often result in evasion, as government officials
get paid to ignore domestic residents who shift funds overseas. Finally, capital controls
may provide government officials the false sense of security that they do not
have to reform their financial systems to ameliorate the crisis.
Although economists are generally dubious of controls on capital outflows, controls
on capital inflows often receive more support. Supporters contend that if speculative
capital cannot enter a country, then it cannot suddenly leave and create a
crisis. They note that the financial crisis in East Asia in 1997–1998 illustrated how
capital inflows can result in a lending boom, excessive risk taking by domestic banks,
and ultimately financial collapse. However, restrictions on the inflow of capital are
problematic because they can prevent funds that would be used to finance productive
investment opportunities from entering a country. Also, limits on capital inflows
are seldom effective because the private sector finds ways to evade them and move
funds into the country.7