Capital and foreign exchange controls, long discredited as enemies of free trade and economic growth, are coming back.
Economic analysts and some senior finance officials are toying with the idea that controls on flows of capital into emerging markets might be useful in avoiding financial crises.
A rush of loans into a country often creates an economic boom, followed by a bust. In reaction, both domestic and foreign investors pull their money out, depleting foreign exchange reserves and making it impossible to cover foreign-currency debts.
"If we cannot find a way to reconcile free movement of capital with prevention of financial crises, then many countries may draw the lesson that they are better off with capital controls," Mervyn King, deputy governor of Bank of England, warned in a recent interview. Mr. King opposes the use of controls and urges emerging-market countries to make their financial situations more "transparent."
Mr. King's suggestions were in response to proposals that the world monetary system be modified. If capital controls were permitted, it would be a sharp break from the market-oriented, deregulation approach being pressed by the United States.
According to a BankBoston Corp. survey of 101 senior bankers this year, 66% said they expected increased use of global capital controls, 12% expected no change, and 19% predicted less use of controls.
"I remain skeptical of capital controls," said David Sekiguchi, vice president for emerging-market research at J.P. Morgan & Co. "They can open the way to distortions."
Others cast doubt on the effectiveness of capital controls.
"Volatility is the nature of the beast that is capital markets," said Scott Pardee, executive director of the financial research center at the Massachusetts Institute of Technology and a former Federal Reserve official.
Providing impetus to the pro-control movement has been the recent relatively good performance of countries such as India and Malaysia, which have avoided the deep economic recession across Asia.
But bankers warn that capital controls, by insulating countries from the market, can postpone needed reforms. They also say controls are meaningless without reining in domestic investors who, more often than not, are the first to ship their money out of the country. "Foreign investors are the frosting on the cake, and the big money going through domestic stock and bond markets is domestic money," Mr. Pardee said.
Mr. King said he prefers what he calls "the middle way," a market-oriented approach. "The key is to avoid maturity and currency mismatches on the national balance sheet," he said.
His proposal -- not necessarily Bank of England's -- is that emerging markets be more forthcoming about their foreign debts, making public full reports of their financial status so that investors could better decide whether to invest more.
There is no way to force countries to come clean, Mr. King said, but their reluctance to cooperate could be an important signal to the investment community.
Perhaps the greatest advantage of preparing such reports, even if the country does not publish them, is that the government would have a good idea of where its finances stand, Mr. King said. Many of them lack this vital information. For example, they do not know how much refinancing they will face in the next 12 months.
Armed with such knowledge, an emerging-market government could hedge its exposure, assuring that the country could meet its future payments, Mr. King said. He acknowledged there would be a cost to doing so, but said that cost would be minor compared with an economic collapse.
