Post-Crisis Capital Account Regulation in South Korea and South Africa

In the immediate aftermath of the global financial crisis, the world economy was characterized as experiencing a ‘two-speed’ recovery. Industrialized nations, where the crisis occurred, saw slow growth whereas many emerging market and developing countries grew significantly. These growth differentials, coupled with significant interest rate differentials across the globe, triggered significant flows of financial capital to the emerging market and developing countries. As a result, many countries experienced sharp appreciations of their currencies and associated concerns about the development of asset bubbles. This paper examines measures taken to mitigate the harmful effects of excessive capital flows in South Korea and South Africa. Each of these nations experienced similar surges in inflows with associated exchange rate and asset bubble woes, but each took quite different approaches in an attempt to mitigate those effects. South Korea devised a series of capital account regulations on the inflow of capital whereas South Africa liberalized their existing regulations on capital outflows. We econometrically analyze the effectiveness of these measures and find some limited evidence that both countries’ measures were successful in lessening the appreciation and volatility of their exchanges rates. These nations were less successful in stemming asset bubbles.