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Economic theory predicts that capital controls have significant negative effects: theyreduce the supply of capital; raise the cost of financing; increase financial constraints fordomestic firms that do not have direct access to international capital markets; reduce thediscipline of markets on decision making; increase the risk or corruption; lead to costly effectsof avoidance and enforcement; and reduce property rights so that approvals for long-terminvestors (on the part of pension funds, insurance companies, mutual funds) are normallyexcluded. Economic liberalization and removal of certain core controls are the remedial measures which require consideration for developing economies.
