Emergence of capital controls

Still too early to say if this the start of something new and big, but it appears that countries are enacting more controls on capital flows into their countries. The Globe & Mail picks up an FT story that may be foreshadowing the new investment environment:

Brazil moved overnight to close a loophole that had allowed investors to avoid a 2 per cent tax on foreign investment in equities and bonds announced last month.

The government announced a 1.5 per cent tax on American Depositary Receipts. Guido Mantega, Brazil’s finance minister, said some foreign investors had been buying ADRs to get exposure to the local equity market while avoiding the tax.

With interest rates in major economies at record lows as their economies crawl out of recession, speculative investors have poured funds into faster-growing emerging markets in recent months in search of yield.

Those speculative flows have now reached the point where many emerging market currencies have hit levels that threaten to undermine their export sectors.

So far most emerging market economies have managed the problem by intervening in currency markets to slow the appreciation of their currencies.

...

Indeed, the Indonesian rupiah dropped sharply after the country’s central bank said it was considering steps to limit inflows on Thursday.

Darmin Nasution, deputy governor of Bank Indonesia, said the central bank was “seriously” studying the option of limiting inflows into short-term government bonds.

The rupiah, which has risen more than 17 per cent against the dollar so far this year and is Asia’s best-performing currency, dropped 1.6 per cent to Rp9,525 against the dollar.

Meanwhile, the Indian rupee lost ground on reports that the government was planning set quotas on corporate foreign borrowing in a bid to stem the rupee’s advance.

...

Elsewhere, Taiwan, which earlier this month banned foreigners from putting money into time deposits in a bid to keep a lid on its currency’s gains, said some of the speculative money had already left the country.

The world has largely been on a liberalizing trend for the last decade, with more and more countries opening up their markets to capital flows, but I wonder if the trend is starting to go in the opposite direction now. In the late 90's, capital inflows were blamed for the bubbles with the Asian Tigers but the cause is never clear. Do capital flows worsen bubbles, or are they simply the result of bubbles?