ABSTRACT
It has long been argued that the capital account of the balance of payments should be one of the last things to be liberalized. There are good reasons for this recommendation, and they remain valid. The failure of the liberalization programs implemented in the Southern Cone in the late 1970s demonstrated that these dangers are far from hypothetical. The high cost of New Zealand's liberalization program, which again started with a liberalization of the capital account, has provided a subsequent confirmation of the analysis. The main reason that countries seek to control capital outflows is to avoid a loss of savings that could be invested in the domestic economy. Countries with large stocks of foreign assets have a strong reason to liberalize capital outflows in order to privatize the foreign investment decision. An open capital account exposes the financial sector to the disciplines of foreign competition.
