The report notes that free capital mobility, while it has worked well for large industrial countries, has been `working less satisfactorily for a number of the emerging market countries.' The US dollar has strengthened, and corresponding outflows have caused the deutsche mark and the yen to weaken, redistributing demand from the overweight US to Europe and Japan.

But emerging markets have had `less happy experiences' with free capital flows, says the report. In countries with floating currencies, excessive inflows have caused currency appreciation, and consequent disinflation and uncompetitiveness, while excessive outflows have increased competitiveness but imported inflation.

Fixed exchange rate regimes have fared worse. Excess inflows have created excessive monetary growth andthereby domestically generated inflation (Hong Kong), while excessive outflows have led to a depletion of foreign currency reserves and then a collapse of the currency (Thailand, Korea and above all Indonesia).

The experience, the report notes, has been at its most unhappy when a depreciating currency has seriously overshot, raising the domestic currency cost of servicing foreign currency denominated debt to the point where foreign indebted entities--banks or companies--simply cannot service their debt and go bankrupt (again, Thailand, Korea and particularly Indonesia).

Closer inspection, however, reveals in all cases that the country in question has one or more serious macro-economic imbalances, in which case imposing restrictions, generally on capital outflows, is to treat the symptoms rather than the cause, says the report.

Controls in a situation of macro-economic imbalance cannot achieve much, says the report. The controls may in the immediate period arrest downward pressure on the currency, andallow interest rates to be brought down, so that money moves back into the stock market (witness Malaysia recently). But the report says these `apparently benign' results do not last long.

The report says that the next stage is where ways are found to circumvent the capital controls, and since having imposed the controls, the policy makers do not act with sufficient speed and decisiveness on the underlying macroeconomic imbalances (mistaking the successful treatment of the symptoms as a cure), the benefits are lost.

If policymakers do not succeed in closing loopholes to circumvention of capital controls, a parallel market develops resulting in misallocation of resources. On the other hand, if they succeed in closing the loopholes, capital inflow from abroad is choked off.

A country then has to finance its entire investment needs through domestic technology, and lose access to foreign skills and technology, losing the ability to sell goods and services abroad. Exports `tail off', and current accountdeficit widens, forcing more dangerous trade protection policies. "Finally the country finds itself more or less economically isolated from the outside world: it has become a Burma or a North Korea," says the report.

The conclusion, says the report, is `inescapable': Countries which wish to become, or remain, a part of the open trading world have no viable option but to pursue balanced macroeconomic policies. Sparingly used temporary capital controls, says the report, may on occasion be beneficial in buying a breathing space but in the longer run, capital controls are a disaster.