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CAPITAL FLOWS.
Term Paper ID:26072
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Essay Subject:
History since gold standard, patterns, emerging & U.S. markets, efforts to manage flows, benefits & drawbacks.... More...
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6 Pages / 1350 Words
9 sources, 17 Citations,
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Paper Abstract:
History since gold standard, patterns, emerging & U.S. markets, efforts to manage flows, benefits & drawbacks.
Paper Introduction:
INTRODUCTION
International capital flows both benefit emerging nations and in some cases damage their ability to develop. The result depends on world circumstances and a variety of factors. Recently, numerous reports suggested that international capital flows were a major cause of the Asian financial crisis, for instance (Chote, 1998). Capital flows play an important role in the international economy and have a particular relationship to emerging markets. A historical overview of the nature of capital flows leads to a consideration of capital flows in terms of emerging markets in recent decades, with the question being raised as to whether capital flows should be controlled in order better to shape the emerging markets and assist in their economic development.
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Once capitalflows reversed, new capital flows dried up and existing capital fled(Kindleberger, 1978). However, disaster was about to intrude. Critics say this explains why capital mobility hasnot only failed to provide tangible economic benefits but has imposed largecosts and so should be controlled: "The more radical, the less likely tosucceed" (1999). Everything was now in place fordramatic reversals in capital flows. One issue is how to impose controls. Turner, P. Another group arguesthat capital flows offer some benefits but also greater risks, especiallyfor emerging nations. CONTROL OF CAPITAL FLOWS The discussion today centers on whether capital flows should becontrolled and whether this would benefit or harm emerging nations. The Economist. Of take-offs and tempests: Can capital controls stop poor countriescrashing?. Given the small size of financial markets in the emerging nations,minor portfolio adjustments for fund managers in the U.S. (1991). The countries of Asia have high rates of growth and so attractcapital for profitable investment. The origins and nature of the Great Slump.London: University of Leicester. An argument can be made forprudential controls on inflows, but ad hoc controls on capital inflows aremore problematic. International capital markets: Developments, prospects, and keypolicy issues. Japan became a prime source of capital flow as the decade progressedbecause the country was a large saver and because the drawn-out recessionmeant that interest rates were extremely low. The theoretical benefits of the free movement of capital include thefact that it enhances economic welfare by channeling savings to their mostproductive uses, and capital mobility also allows countries to insurethemselves against risk. Capital flows play animportant role in the international economy and have a particularrelationship to emerging markets. Thevalue of foreign money is clear, but analysts believe that the Asiancrisis, and the 1995 Mexican crisis before it, shows that some types ofcapital can flow out even more rapidly than they flowed in, causing seriouseconomic harm in countries with badly regulated financial systems. Battle to prevent global disaster.Financial Times, 6-7. INTRODUCTION International capital flows both benefit emerging nations and in somecases damage their ability to develop. Recently, numerous reportssuggested that international capital flows were a major cause of the Asianfinancial crisis, for instance (Chote, 1998). (1978). When a turning point was reached inconfidence, there was a herd mentality bordering on panic. Britaincontributed little to these regions and instead concentrated on Australiaand New Zealand. Struggle is on to fit the piecestogether again. The surge in capital flows in the 199 s can also be related tochanges in the institutional channels of transmission. However, close analysis of the evidence shows that Chile doeslittle to bolster the case that controls on capital inflows should betreated as temporary protections while banks are weak ("Of take-offs andtempests," 1998). Cooper, R.W. of Economics,Princeton University. New York: Basic Books. (1998, March 14). However, there wouldlikely be great pressure to keep such controls for a longer period of timethan necessary so that the end result could well be the use of controls toavoid making the necessary reforms. The Economist. The more radical, the less likely to succeed: A wealth of blueprints. The result depends on worldcircumstances and a variety of factors. 3 . Fearon, P. By August of that year, though, GoldmanSach's forecast that Indonesian output would shrink by 15 percent,Thailand's by 8 percent, and South Korea's by 7 percent (Wolf, 1998). (1998, October 3). Oneof the world's most successful economic regions had fallen on hard times,and an immediate cause for this disaster was an extraordinarily swiftturnaround in capital inflows as net private capital to Indonesia,Thailand, and South Korea, plus Malaysia and the Philippines, went from aninflow of $97 billion in 1996 to an outflow of $12 billion in 1997. There are doubts that controls on capital would beeffective or helpful, and different countries will likely make theirchoices in different ways. Capital flows do show a pattern of variability that has beenassessed. Some economists argue that the afflicted countries ofAsia can recover only with lower interest rates. Capital flows then tookthe form of productive investment, and in this manner real assets werecreated that could help service the debt of developing countries. (May, 1998). The money was used by public utilities, distributionprocessing, and financial services, and only a small amount went intomanufacturing (Fearon, 1981). In the U.S., there was a significant increase in the number andinfluence of institutional fund managers with huge amounts of capital, andthese managers were more focused on the need for portfolio diversificationand so shifted to having significant exposure in emerging countries (IMF,1998). Wolff, M. Economic theory usually assumes that market outcomes will bebeneficial, meaning that capital flows are a good thing which are supposedto supplement domestic savings so as to allow more investment in thosecountries where returns are highest. Princeton, New Jersey: International Finance Section, Dept. Essays in international finance: No. Financial Times, 1-2. After World War II, capital flows repeated this pattern, largelybypassing the so-called Third World, and this was especially true in the198 s (Turner, 1991). Capital flows in the 198 s: A survey of majortrends. Capital inflows should buffervariations over time between exports and imports (Cooper, 1998). In addition, expected returns on equitywere consistently higher than those in more mature markets, and theirvolatility was below those of more mature, industrialized markets (IMF,1998). References Chote, R. Thisshift was equal to more than 1 percent of the aggregate pre-crisis grossdomestic product of these countries. capital markets,which apparently helped to pervert the allocation of capital as well as tolubricate it. Though at that time, and for some timelater, there was only a limited range of investment vehicles available,primarily stocks, bonds, and direct investments. HISTORICAL OVERVIEW In the period before the introduction of the gold standard in 1914,capital flows were significant. CONCLUSION One group argues that capital flows are primarily beneficial but thatthe variability of such flows is clearly harmful. In the 192 s, U.S. By the mid-199 s, developing countries werereceiving 4 percent of global foreign direct investment, compared with 15percent in 199 , and accounted for 3 percent of global portfolio equityflows, compared with two percent in 199 (IMF, 1998). While it might seem that profit rates would havebeen higher in the developing countries, capital largely shunned theSouthern Hemisphere until the emerging market boom of the 199 s. Most of this capital flowfirst went to the United States, though the extra inflows were recycled andsent to emerging countries (IMF, 1998). Thisleads to the new wisdom that, while free capital flows bring more benefitsthan risks, temporary controls on capital inflows can be a useful tool.Proponents point to the case of Chile, which while renowned for its free-market economic policies, also actively discourages short-term capitalinflows. Kindleberger, C.P. RECENT CAPITAL FLOWS TO EMERGING MARKETS In the 199 s, the pattern of capital flows changed dramatically, andbeginning in 199 , there was an extraordinary increase in flows,particularly in Asia. (1981). (September 1998). holdings of foreign securities more than tripledand direct investments doubled as money flowed to Latin America, Canada,France, Belgium, Sweden, Austria, and Germany (Fearon, 1981). Turner (1991) argues that the explanation for this inflow toindustrialized nations could be found in the depth of U.S. The greatest turnaround was made bycommercial banks, from providing an inflow of $56 billion in 1996 todemanding an outflow of $27 billion in 1997 (Wolff, 1998). Credit ratingagencies increased their coverage of emerging markets, and the end of thedebt crisis in Latin America in the 198 s saw the issuance of Brady Bondsby which previous debt was settled in a way that gave new investorsconfidence that their debt would be honored (IMF, 1998). BIS Economic Papers No. (1998, October 2). However, there are also substantial risks becausewithout perfect information, investors move in herds at considerable costto the real economy. A historical overview of the nature ofcapital flows leads to a consideration of capital flows in terms ofemerging markets in recent decades, with the question being raised as towhether capital flows should be controlled in order better to shape theemerging markets and assist in their economic development. International Monetary Fund, Washington,D.C. Manias, panics & crises: A history offinancial crises. meant largechanges for any recipient country. This wascounter to traditional economic logic as the classical function ofinternational capital markets was to allocate funds to areas of highestreturn. Basil, Bank for InternationalSettlements. 2 7. Capitalinflows of this type typically found their way back to capital exportingcountries in the form of demand for capital equipment (Turner, 1991). In the spring of 1997, theInternational Monetary Fund's World Economic Outlook foresaw economicgrowth in 1998 at a little over 6 percent in Thailand and South Korea andmore than 7 percent in Indonesia. (1999, January 3 ).
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