Capital Management Techniques In Developing Countries: An Assessment of Experiences from the 1990's and Lessons For the Future
Creators: name: Epstein, Gerald 
Publisher: name: University of Massachusetts Amherst
Year: 2003

description: This paper uses the term, capital management techniques, to refer to two complementary
(and often overlapping) types of financial policies: policies that govern international private
capital flows and those that enforce prudential management of domestic financial institutions.
The paper shows that regimes of capital management take diverse forms and are multi-faceted.
The paper also shows that capital management techniques can be static or dynamic. Static
management techniques are those that authorities do not modify in response to changes in
circumstances. Capital management techniques can also be dynamic, meaning that they can be
activated or adjusted as circumstances warrant. Three types of circumstances trigger
implementation of management techniques or lead authorities to strengthen or adjust existing
regulations--changes in the economic environment, the identification of vulnerabilities, and the
attempt to close loopholes in existing measures.
The paper presents seven case studies of the diverse capital management techniques
employed in Chile, Colombia, Taiwan Province of China, India, China, Singapore and Malaysia
during the 1990s. The cases reveal that policymakers were able to use capital management
techniques to achieve critical macroeconomic objectives. These included the prevention of
maturity and locational mismatch; attraction of favored forms of foreign investment; reduction in
overall financial fragility, currency risk, and speculative pressures in the economy; insulation
from the contagion effects of financial crises; and enhancement of the autonomy of economic
and social policy. The paper examines the structural factors that contributed to these
achievements, and also weighs the costs associated with these measures against their
macroeconomic benefits.
The paper concludes by considering the general policy lessons of these seven
experiences. The most important of these lessons are as follows. 1.) Capital management
techniques can enhance overall financial and currency stability, buttress the autonomy of macro
and micro-economic policy, and bias investment toward the long-term. 2.) The efficacy of
capital management techniques is highest in the presence of strong macroeconomic
fundamentals, though management techniques can also improve fundamentals. 3.) The nimble,
dynamic application of capital management techniques is an important component of policy
success. 4.) Controls over international capital flows and prudential domestic financial
regulation often function as complementary policy tools, and these tools can be useful to
policymakers over the long run. 5.) State and administrative capacity play important roles in the
success of capital management techniques. 6.) Evidence suggests that the macroeconomic
benefits of capital management techniques probably outweigh their microeconomic costs. 7.)
Capital management techniques work best when they are coherent and consistent with a national
development vision. 8.) There is no single type of capital management technique that works best
for all developing countries. Indeed our cases, demonstrate a rather large array of effective
techniques.
There are sound reasons for cautious optimism regarding the ability of policymakers in
the developing world to build upon these lessons. In particular, we are heartened by the growing
understanding of the problems with capital account convertibility in developing countries; by the increasing recognition of the achievements of capital management techniques by important
figures in academia, the IMF and the business community; and by the potential for some
developing countries (such as China, India, Malaysia, Chile, Singapore) to play a lead role in
discussions of the feasibility and efficacy of various capital management techniques.