NCPA - National Center for Policy Analysis

Chile's Experience With Capital Controls

December 15, 1998

Chile imposed a tax on short-term foreign loans from 1991 to 1998. The tax, a moderate form of capital control, has been credited by some observers with helping Chile resist the recent financial shocks in global markets. The idea behind the tax was to stop a surge of capital pouring into Chile that the Central Bank feared would raise the value of the peso and hurt exports.

Economists say the tax didn't achieve its purpose:

  • They say the tax has not protected Chile from financial volatility, but has created distortions which have cost the country in a number of important ways.
  • Tax evasion was considerable and large Chilean corporations began issuing lightly-taxed or tax-exempt long-term bonds in international markets -- precipitating a surge of capital into the country that caused a 25 percent rise in the peso's real value in a few years.
  • Chilean authorities eliminated the tax in September 1998, but it had already aborted a promising cross-border bank loan business and encouraged Chilean stockbrokers to migrate to New York.

Even now, the threat that the tax might be reimposed is keeping banks and brokers from investing in stockbrokerages in Chile, because their business could be wiped out.

Source: Salvador Valdes (Catholic University of Chile), "Capital Controls in Chile Were a Failure," Wall Street Journal, December 11, 1998.


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