The importance of capital controls in Vietnam

Abstract

This paper provides a simple theoretical framework on the restriction of short-term investments such as stocks, bonds, and other indirect investments while encouraging foreign direct investment (FDI) as a long-term investment. The theoretical results show that a developing country like Vietnam should maintain certain level of capital controls on short-term investments. The paper then provides an empirical study of the five ASEAN countries that are either in the negotiating process or willing to join the Trans-Pacific Economic Partnership with an emphasis on Vietnam. The empirical results show that FDI has positive effect on GDP per capita in these five countries as a group and as individual economies. In contrast, short-term investment has negative effect on GDP per capita in four economies with Singapore as the only exception.