The case against controls starts with the contrasting proposition that they haven't slowed the volume of foreign funding at all. The reason for Chile's relative stability during the Mexican turmoil, goes this line of thinking, had nothing to do with foreign capital. Rather, it was primarily because Chile had a high level of domestic savings to finance development, as well as a strong banking system. Since then, says Libertad Y Desarrollo's Mr. Larroulet, the level of domestic savings has dropped, due to misguided taxation policies, and the current-account deficit has risen sharply. In contrast with the limited impact from Mexico in 1994-95, East Asia's distant crisis is now affecting Chile, he says.
Many people simply believe the economy is healthy and unlikely to face the panic seen in East Asia.
Mr. Fontaine, for one, thinks that if Chile were hit directly with an East Asian-type crisis of confidence, much foreign capital would flee. Private companies would find innovative ways around the controls, he says. Critics include adverse social effects among the distortions created by controls. For example, small and medium-sized enterprises, vital in providing jobs, are at a disadvantage to large companies in raising funds that are cheaper on the international market. Outside Chile, some economists suggest that the reserve requirements may lose their effectiveness over time.