Monday, March 20, 2006

Money isn't Things

via Atrios, Daniel Davies has an excellent post about why ownership restrictions - and capital restrictions in particular - aren't "protectionism", but often make perfectly good sense, policy wise:
It's easy to explain why tariffs are bad. They're a tax on a particular economic activity - trade. ... There is a deadweight loss associated with this, and empirically it turns out that this deadweight cost is substantial. That's why tariffs are bad, and why we have a WTO dedicated to removing them.

On the other hand, ownership of a company isn't an economic activity at all (because "ownership" isn't an activity, it's something you can do while sleeping, in a coma or even dead). So it is much harder to see how any deadweight loss can be created by placing taxes or other kinds of barriers on overseas investment in domestic companies. ... And the empirical evidence bears this out as well; while the gains from goods markets liberalisation are big and definitely there, the gains from capital account liberalisation are small and frustratingly difficult to detect, no matter what econometric techniques you bring to bear.
Throughout the 1980s and 1990s, we pursued a whole collection of policies in the developing world more out of ideological fervor than any economic efficiency. Starting in 1997 - and more or less continuing until 2002 - we had a series of continuing debt crises caused to varying degrees by those same capital account liberalizations.

It's important to say that - whatever the merits of the fight against Dubai owning 6 ports - there's a reasonable position on ownership restrictions in particular, and capital restrictions generally.

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