One may therefore argue that Malaysia's recovery was not because of, but in spite of, capital controls. Equally noteworthy is the fact that Malaysia was able to avoid fire sales. It now appears that many foreign investors are coming to terms with Malaysia's capital controls. For one thing, there was no massive exodus of foreign capital in September 1999 at the end of the one-year moratorium. For another, capital controls were relaxed gradually, with the freeze being first substituted with a graduated exit tax which was subsequently replaced by a flat 10 percent tax on repatriated profits.
Foreign capital is free to move in and out.
Capital controls now apply strictly and rigidly to domestic capital only. It is domestic capital, not foreign capital, that is really caged. It was made crystal clear by the authorities that capital controls were aimed not at foreign direct investment but at short-term speculative capital. Ironically, the impact has been the other way around. The massive inflow of short-term capital in recent months does pose problems of sorts.