The advantage of such a system is that the government can influence its payments
position by regulating the amount of foreign exchange allocated to imports
or capital outflows, limiting the extent of these transactions. Capital controls also
permit the government to encourage or discourage certain transactions by offering
different rates for foreign currency for different purposes. Furthermore, capital controls
can give domestic monetary and fiscal policies greater freedom in their stabilization
roles. By controlling the balance of payments through capital controls, a
government can pursue its domestic economic policies without fear of balanceof-
payments repercussions.
Speculative attacks in Mexico and East Asia were fueled in part by large changes
in capital outflows and inflows. As a result, some economists and politicians argued
for restrictions on capital mobility in developing countries. For example, Malaysian
Prime Minister Mahathir imposed limits on capital outflows in 1998 to help his
economy regain financial stability.