June 29, 2015
When a nation is fast running out of cash, it often tries to stop the hemorrhaging by clamping down on how much money can leave its borders.
Unfortunately for Greece, history suggests it hardly ever works. The country, teetering on the edge of economic ruin after refusing the demands of its creditors and euro-area officials on a debt agreement, joined on Monday a long list of embattled governments that turned to capital controls.
While dozens of countries from Mexico to Iceland and Thailand have imposed such measures since World War I to boost revenue, prop up currencies and hold down interest rates, the International Monetary Fund found that only those few with sound economies and strong institutions succeeded in slowing capital flight. That poses a challenge for Greece, which is facing a default and an exit from the 19-nation currency bloc after aid talks with creditors broke down and the European Central Bank froze its financial safety net for lenders.
“With Greece, a lot of money has already left the country and they’re sort of shutting the gate after the horse has left the barn,” Michael Klein, a professor of international economic affairs at Tufts University’s Fletcher School, said from Dallas prior to Greece’s announcement. With countries in crisis, “there are issues of how effective they can be.”