Why capital controls are getting harder to enforce

Here is one lesson, involving Venezuela and Curacao, via William Griffiths. 

The "card thing" is an intricate scheme involving local merchants, Socialist bureaucrats, Venezuelan travelers and middlemen.

Trying to slow capital flight, Venezuela limits its citizens to
$5,000 in annual credit card purchases abroad. That is 10,750 bolivars,
at the official exchange rate of 2.15 to the dollar. But at the
prevailing black-market rate of 4.5 to the dollar, the amount more than
doubles to 22,500 bolivars.

Seizing on that gap, some Venezuelans began coming to Curaçao’s
casinos last year and using their credit cards to buy chips. They then
played a few hands and cashed in the chips for dollars, which circulate
here along with guilders.

Dummy receipts are available too.  So, I am puzzled by the generality of Dani Rodrik’s defense of capital controls.  Internet commerce alone should mean that most capital controls aren’t easily enforced.  True, not everyone has access to large-scale transactions on the internet, or some companies may be too big and respectable to try to sneak money out of the country this way.  But if the enforceability of capital controls is relying on such imperfections in individual optimization, I would suggest that the idea, if it ever made sense in the first place, doesn’t have much of a future.

Comments

In his blog entry and
FT article Rodrik does not take the time to actually make a strong case in favor of capital controls. Rather, he simply states that international capital flows cause economic crises, as if this was self-evident, and then spends the rest of his time discussing implementation mechanisms, and arguing against the case against rather than making the case in favor of. Perhaps he has done so elsewhere? A link would be helpful.

Without further clarification, saying that capital flows cause financial crises seems a bit like saying that stock markets or mortgages or international trade cause financial crises. And it would not get much response beyond "You say they do, I say they don't" and a shrug.

Rodrik, for once almost misses the point of modern capital controls. They are not really about stopping capital outflows (and/or inflows); they are about making such transactions more costly and therefore discouraging them. The appropriate froms of them are ones which capture the inevitable rents for the public purse -auctions of the rights to move capital accross the nation'as borders for instance.

"Why don't capital flows across state boarders do the same things?"

Off the top of my head, I would say that broad fiscal transfers and the free movement of labor would most likely be the main difference.

"One would think that investors could (perhaps by looking at price-signals, perhaps not) take the lack of those things into account when investing across national borders, no?"

I don't think you understood my point. Free capital flows between states do cause things like the Asian Financial Crisis. But because of the effects of broad fiscal transfers(Which provide automatic support to the poor) and free movement of labor(Which allows losers from trade to simply move), the effects of such imbalances are not particularly severe.

The use of money causes crises and recessions. Should the government abolish money?

Not only Curacao also panama and Colombia can pss the credit card with a 10 to 15 % discount.Until 2007/12/31 prepaid "credit card" were available so people who has never traveled in thei live went ther.Other sold their Dollars quota and the buyer cash the dollars .Sice december the quota for byuying in internet stores is only 400$ a year, i spent mine in 8 books plus shippment charges.the govern¡met is now suspending quota for those who cant not show how they spended the money.Unless you travel more than 6 days you have no quota to travel.
So there is a new system people send dollars to a relative inColombia , 300 $ a month and then the relative travel by bus to Venezuela and take the dollars back to sell them in the black market.
Un related but thereis something even more scary, in the frontier states you can only put 7 gallons a day to stop you from buying more they take your fingerprint with an electronic device used in elections,. the device is conected to a database.Why because gas cost 20 cent a gallon in Venezuela and 80 cents in Colombia.

Frankly that wasnt the most flagrant form of capital control violation. Before the government changed the internet purchase quota from $4000 to $400 there was a fairly common industry whereby a middleman would pay off an individual, get him a prepaid credit card and make a fictitious purchase in from a Panama domiciled website (which would take a 10% cut and send $3600 to the customer's bank account). The thing is rather large numbers of these where made. For instance, I once witnessed a crew of 3 three, paying off and filling out credit card applications at a construction site in Caracas: there where at least 60-70 workers queued up.

Similar things where also done when the government issued its "Bonds of the South" (which where convertible into dollars, generally at an implicit rate lower than the going dollar-bolivar swap rate). Again "crews" generally filled out dozens of spurious applications at a time to circumvent the allocation caps instituted by the government.

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