Capital Controls in Chile in the 1990s (B) Case Solution

As far as the outcomes of the capital controls are concerned, the data shows that the controls did allow Chilean government to meet its listed objectives. In addition to the economic policies, the political decision making environment also contributed to the increased economic performance. The newly formed democratic government had a clear stance on decreasing inflation and on increasing the relative value of Peso.

2. What were the arguments for and against getting rid of the controls in the context of the aftermath of the Asian and Russian financial crises? What were the alternative policy options? Was Chile in danger of suffering a crisis such as that of 1982?

The Asian crises of 1997 and the Rubble crises of 1998 adversely affected the capital inflows and outflows to the emerging economies. The appreciation in the oil prices and the depreciation in the rubble was the main culprit behind the economic devaluation of cash flows. Hence, If Chile removed the capital controls; it could attract more foreign investors in a period when the emerging markets were experiencing a decrease in investment by other leading economies. It will allow Chile to consolidate and grow its economic stature. On the other hand, removal of the controls will skyrocket the inflation, interest rates and other indicators. Moreover, the ability of Chilean government to control its monetary policy will also be hampered. As a matter of fact, it is clear that Chile was at the brink of financial crises but that chances of this crises becoming stronger than that of 1982’s were minute.