International Trade Finance

Topics: Currency, Monetary policy, Bretton Woods system Pages: 2 (464 words) Published: October 2, 2013
Why does a country like Venezuela impose capital controls?

According to this case, the character of the case; Santiago, part of the pharmaceutical distribution business was working during a time when Venezuela had been “Tumultuous”. Political turmoil affected its economy as well. He opposed Hugo Chavez regiment and was thus “technically” not allowed to exchange domestic currency for foreign currency (as he needed it for his import business). The president of the corrupted county suspended sale of dollars in the country as the Bolivar fell to its record low against the dollar. This led to the establishment of the black markets which traded the domestic currency at a higher rate than what it was actually valued for. The currency from Bs. 1891.50/$ shot up to Bs. 2500/$. Inflation had been “soared” more than 20% per year. To curb this inflation, the government imposed “fiscal policy” measures. The government re-valued its currency to Bs. 1600/$, established a commission to control the distribution of foreign exchange and imposed strict price control so as to ease inflation since Santiago opposed Hugo Chavez, he was not allowed to convert his money. Thus Venezuela manages to impose capital controls.

According to Capital controls, technically it allows a country to preserve a fixed rate of exchange for its currency without risking its holdings of hard currency or foreign currency reserves. The problem, however, is that this control or preservation comes at a substantial cost, as many investors will no longer be willing to invest the same levels of funds in that country, if at all.

Capital controls allow a country, whether Venezuela, Malaysia, or China, to control the level and flow of capital flowing in and out of the country. Because few countries have a problem with too much capital flowing in, but rather with capital out flows—capital flight—capital controls are typically utilized to prohibit massive capital outflows following unfavorable or crises in...
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