Capital controls as a panacea for economic ills are nothing new. Their pedigree can be traced back to Plato, the father of statism. Inspired by Lycurgus, the tyrant of Sparta, Plato embraced the idea of an inconvertible currency as a means to preserve the autonomy of the state from outside interference.
Lebanon has just named Saad Hariri its new prime minister — the same Saad Hariri who resigned from the Lebanese PM post almost exactly one year ago. And, he is enamored with the so‐called French plan to bring Lebanon’s economy back to life. But, there is one major item in the French plan that is a killer — the immediate imposition of capital controls.
Before more people come under the spell of capital controls, they should reflect on the following passage from Friedrich Hayek’s 1944 classic, The Road to Serfdom:
The extent of the control over all life that economic control confers is nowhere better illustrated than in the field of foreign exchanges. Nothing would at first seem to affect private life less than a state control of the dealings in foreign exchange, and most people will regard its introduction with complete indifference. Yet the experience of most Continental countries has taught thoughtful people to regard this step as the decisive advance on the path to totalitarianism and the suppression of individual liberty. It is, in fact, the complete delivery of the individual to the tyranny of the state, the final suppression of all means of escape — not merely for the rich but for everybody.
The imposition of capital controls leads to an instantaneous reduction in the wealth of the country, because all assets decline in value. Full convertibility is the only guarantee that protects people’s rights to what belongs to them. Even if governments are not compelled by arguments on the grounds of freedom, the prospect of seeing every asset in the country suddenly lose value as a result of capital controls should give policymakers pause.
In the case of Lebanon, a country whose lifeblood has been the importation of capital, capital controls would be a killer. They would repel the large and important international Lebanese expatriate community. Indeed, the French capital‐controls mandate for Lebanon should be pronounced dead upon arrival.