The Economic Costs Of Exchange And Capital Controls On Businesses In Namibia – A Focus On Institutional Investors And Exporting Companies

ABSTRACT

The process of globalization has permeated every sphere of human activity, most

notably in the arena of economic globalization. Economic globalization encompasses the

integration of national economies into the international economy through trade, foreign

direct investment, capital flows and migration. The benefits of globalization are

numerous such as foreign direct investments and portfolio flows that engender

accelerated economic growth both in the advanced and the emerging economies and

creation of employment opportunities and poverty alleviation. Capital exporting countries

earn higher returns on investments.

However, large capital flows emanating from the global financial markets could

have disruptive effects on the global economic system. These pervasive effects of capital

flows are often more pronounced in the developing and emerging countries, which often

lack sufficient institutional capacity to mitigate such large capital flows.

Based on the economic logic that capital allocation is more efficient in the absence

of exchange control and barriers to competition in financial markets, standard economic

theories postulate the view that free movement of capital across international borders

carries profound and widespread benefits. However, the recent global economic crises

have led opinion makers to advocate for the use of capital controls especially for

emerging and developing economies. Leading economists and policy makers world-wide

are now recalibrating their views on the benefits of free capital flows, advocating for the

The Economic Costs of Exchange and Capital Controls on Businesses in Namibia- A focus on

institutional investors and exporting companies xii

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use of exchange controls, in certain circumstances as a way to reduce a country’s

vulnerability to international financial crises.

This research paper found that existing exchange and capital controls in Namibia

impose economic costs as they tend to misalign companies’ decisions resulting in less

optimal risk diversification options and exchange rate losses. Other costs on business

manifest in the form of opportunity costs, administrative burdens and inefficiency losses.