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capital flows

Handling volatile capital flows--the Indian experience

Poonam Gupta's picture
Capital flows to emerging economies are considered to be volatile. Influenced as much by global liquidity and risk aversion as by economic conditions in receiving countries, capital flows move in a synchronous fashion across emerging economies. There are periods of rapid capital inflows, fueling credit booms and asset price inflation; followed by reversals when exchange rates depreciate, equity prices decline, financial volatility increases, and GDP growth and investment slows down. These periods of extreme flows have unintended financial and real implications for the recipient countries.

In the long run, we all want to be alive, and thrive

Hans Timmer's picture

Ninety years ago, in his A Tract on Monetary Reform Keynes famously wrote “In the long run we are all dead”. That observation recently stirred a lot of debate for all the wrong reasons, after Niall Ferguson obnoxiously claimed that Keynes did not care about the future because he was childless. Whether Keynes cared about the long-term future or not (and whether he had children or not) is completely irrelevant in this context, as many (e.g. Brad DeLong and Paul Krugman) have pointed out.

The actual context in which Keynes wrote this observation was a discussion about the quantity theory of money, which states that doubling the supply of money will only double the prices, but will have no consequences for other parts of the economy. This is the classical dichotomy between real and nominal variables. Keynes argued: “Now in the long run this is probably true”. But “In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.”  So, Keynes’ point was obviously not that the future doesn’t matter. His point was that simple theories that might describe long-term relationships are just not good enough to deal with current issues. In the short run, changes in money supply can have all kinds of important consequences beyond the price levels. Economists will have to make their hands dirty and delve into the complicated dynamics of the here and now.

Managing Capital Flows

Shahrokh Fardoust's picture

With sluggish growth in advanced economies, much investment money is heading south to more favorable climates. And while capital flows can provide greater opportunities for emerging and developing economies to pursue economic development and growth, capital inflows can also pose some serious policy challenges for macroeconomic management and financial sector supervision. Recently, large capital inflows in some middle-income countries have placed undue  upward pressure on their currencies, adversely affecting  macroeconomic and financial system stability as well as export competitiveness in a number of  these countries. Furthermore, the pro-cyclical nature of global capital flows to emerging and developing economics can serve to aggravate these risks.

International capital flows: Final picture from 2009

Shahrokh Fardoust's picture
 Photo: Istockphoto.com

As snow covers ground in Washington, D.C., debt markets swoon, and another year comes to a close, it seems like a good time to look at what actually happened to international capital flows to developing countries last year and what that might portend for flows in 2010, as this year’s numbers will be finalized in coming months.

At a time when the global economy has seen the most severe slowdown since the end of WWII, capital flows to the developing world—including private flows (debt and equity) and official capital flows (loans and grants from all sources)—are in an overall slump, well below their level in 2007 ($1.1 trillion). According to the just-published Global Development Finance: External Debt of Developing Countries, which contains detailed data on the external debt of 128 developing countries for 2009, net capital flows to these countries fell by 20 percent from $744 billion in 2008 to $598 billion in 2009.