The economic costs of exchange and capital controls on busineses in Namibia - A focus on institutional investors and exporting companies.

Abstract

The process of globalization has permeated every sphere of human activity, most notably in the arena of economic globalization. Economic globalization encompasses the integration of national economies into the international economy through trade, foreign direct investment, capital flows and migration. The benefits of globalization are numerous such as foreign direct investments and portfolio flows that engender accelerated economic growth both in the advanced and the emerging economies and creation of employment opportunities and poverty alleviation. Capital exporting countries earn higher returns on investments. However, large capital flows emanating from the global financial markets could have disruptive effects on the global economic system. These pervasive effects of capital flows are often more pronounced in the developing and emerging countries, which often lack sufficient institutional capacity to mitigate such large capital flows. Based on the economic logic that capital allocation is more efficient in the absence of exchange control and barriers to competition in financial markets, standard economic theories postulate the view that free movement of capital across international borders carries profound and widespread benefits. However, the recent global economic crises have led opinion makers to advocate for the use of capital controls especially for emerging and developing economies. Leading economists and policy makers world-wide are now recalibrating their views on the benefits of free capital flows, advocating for the use of exchange controls, in certain circumstances as a way to reduce a country’s vulnerability to international financial crises. This research paper found that existing exchange and capital controls in Namibia impose economic costs as they tend to misalign companies’ decisions resulting in less optimal risk diversification options and exchange rate losses. Other costs on business manifest in the form of opportunity costs, administrative burdens and inefficiency losses.