Did capital controls decrease capital flows in Malaysia?

This article considers whether Malaysian capital controls were effective in reducing short-term capital flows, as the authorities intended. Although the controls began in September 1998, the effectiveness of Malaysian capital controls has not been demonstrated. This article analyzes the regressions using dummy variables and by constructing a profit rate differential index over the period of the changes in controls as an independent variable. These variables are composed of the profit rate differentials between Malaysia and the US and the levy on repatriation of profits after the introduction of the controls. This paper estimates the impact of the controls not only on gross capital flows but also on net capital flows in order to determine whether the controls were successful. The regression results suggest that gross and net capital flows were influenced by the introduction of the controls, and that they fluctuated because of changes in the controls. The net capital inflows continued to decrease after the controls were lifted. In addition, investors did not depend on the profit differential after the 12-month holding rule was replaced with the exit levy system. This indicates that the process of liberalizing and abolishing strict capital controls may encourage capital outflows.