Capital Controls and Foreign Investor Subsidies Implicit in South Africa's Dual Exchange Rate System

P.C. van der Windt, Eric Schaling () and Harry P. Huizinga

No 2007-91, Discussion Paper from Tilburg University, Center for Economic Research

Abstract: Both in theory and practice, capital controls and dual exchange rate systems can be part of a country's optimal tax policy. We first show how a dual exchange rate system can be interpreted as a tax (or subsidy) on international capital income. We show that a dual exchange rate system, with separate commercial and financial exchange rates, drives a wedge between the domestic and foreign returns on comparable assets. As a borrower, the government itself is a direct beneficiary. Secondly, based on data from South Africa, we present empirical evidence of this revenue implicit in a dual exchange rate system; a revenue that amounted to as much as 0.1 percent of GDP for the South African government. However, this paper also shows that both the capital controls and the dual exchange rate system in South Africa gave rise to many perverse unanticipated e?ects. The latter may render capital controls and dual exchange rate systems unattractive in the end and, thereby, provides a rationale for the recent trend in exchange rate liberalization and unification.

JEL-codes: H21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-afr, nep-cba and nep-mon
Date: 2007
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Working Paper: Capital Controls and Foreign Investor Subsidies Implicit in South Africa's Dual Exchange Rate System (2007)
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