Foreign capital obviously can be of tremendous benefit in helping economies to modernize and grow. At the same time, the tendency of foreign investors to pull their capital out of a country at the same time, as has recently been observed in various instances throughout the globe, can leave an economy in serious trouble.
How can the benefits of foreign capital flows be retained while their adverse sideeffects are minimized? Some observers have pointed to the Chilean experience with capital controls. These controls, which have now been removed, were intended to discourage inflows of short-term capital, and along with measures to strengthen the banking system, may have helped insulate Chile’s economy from the recent round of financial disturbances.