I suspect that the concept of the state giving up control in order to empower the individual is just too much of an ideological leap for your average vampire state enthusiast. Control(esp. for the state) is an end in itself as much as it is a means, economic growth be damned.

And I think the government would rather tread water than take any kind of risk. They would rather take 2 steps forward and 1 step back rather than take 10 steps forward and 5 steps back. They remember the exceptions more than the rule, like how during the East Asia financial crisis, the countries with the most open currency markets got raped the most by fleeing capital while countries like Malaysia locked everything down and came out much less damaged(at least in the short term). A dictator would rather continue the same poor status quo than end up like Suharto.

Asia: while not all countries that tied their currency to the dollar were hit, all the countries that got hit had tied their currencies to the dollar. There's a lesson in there: let the market set the exchange rate. You'll be better off.
And I think it was tomscud who once posted something that I hadn't even thought of: elites in Third-World basket cases like an artificially high currency, since it makes their foreign-sourced goodies cheaper for them.

You should really read Panics, Manias and Crashes by Charles Kindelberger.

That would have been me.

I haven't read Panics, Manias and Crashes but I take it from reviews and summaries found on the web that it deals with irrational speculative bubbles. That pretty much joins Djuha's argument, that they would rather not take 10 steps forward and 5 steps back. Though imo, inertia has more to do with it. Preventing free movement of capital in order to avoid forex related speculative bubbles makes as much sense as imposing communism as an answer to market excesses.

Now, for my more extended comments.

First, I think Djuha has it largely right with respect to risk aversion. Mind you I have these conversations with MENA central bankers I run into all the time about how their economy would in fact bloody well profit were they to loosen up, as well as make their currency more compeitive. But there is risk aversion, as well as the issue of over-valuation being a hidden subsidy to the consuming classes (not just the elites, but the fonctionariate who may be not that well paid, but due to their rare status as having on the books jobs, better able to access formal consumption credit.)