E. The international environment Financial liberalization and capital flows

Capital flows

But even though net international capital flows are going the wrong way, there are still substantial gross capital flows outward from the world economy s core to its periphery.

Capital flows and remittances

Given that international capital flows had restarted, they did not fear immediate external constraints.

C. Investment and capital flows

Private sector capital flows now dwarf traditional public sector aid flows.

And, to address volatile capital flows, countries should increase exchange rate flexibility, maintain adequate international reserves, and implement carefully designed capital controls.

Encouraging private capital flows and remittances

But even though net international capital flows are going the wrong way, there are still substantial gross capital flows outward from the world economy s core to its periphery. And we can hope that these capital flows will carry with them the institutions and managerial expertise that have made the core so wealthy.

Afterward, capital flows to developing countries stagnated.

These factors considerably limit those countries' ability to attract foreign direct investment and other international private capital flows.

But we all know the outcome while international capital flows soared, the large net flow of capital from rich to poor countries simply never materialized.

Table 2 Private capital flows to Africa, 1998 2003

Over the past decade, the global economy has achieved unprecedented prosperity built on trade, international capital flows, and technological innovation.

a. avoid destabilising capital flows to maximise benefits from globalised capital markets, thereby minimising risk

Prudential controls on capital flows make a lot of sense.

The spreads are necessary to keep capital flows within the eurozone in check. Before the introduction of the euro, capital flows had been limited by uncertainty about exchange rates.

Even the International Monetary Fund, long the embodiment of the Washington Consensus, has acknowledged that capital controls are a legitimate part of the toolkit to manage capital flows in certain circumstances.

Private capital flows have come to play the dominant role in development finance, eclipsing both official bilateral and multilateral flows.

But their heavy reliance on international trade and capital flows means that they remain vulnerable to severe financial spillovers from the United States.

Private capital flows have exploded since, dwarfing trade in goods and services.

Freeing up capital flows had an inexorable logic or so it seemed.

Net private capital flows, particularly to developing economies, have become more volatile.

The lack of effective global economic governance has important implications for capital flows.

Obviously, it requires that governments renounce direct restrictions on trade and capital flows.

Of course, even if the composition of international capital flows can be changed, there are still many good reasons to try to reduce global imbalances.

What national and international efforts can be made to increase the stability of private capital flows to developing countries and to maximize their development impact?

There were many other innocent victims, including countries that had not even engaged in the international capital flows that were at the root of the crisis.

Re erecting barriers to capital flows in the form of international taxes, thereby cordoning off crises before they turn global, is therefore another task for government.

That configuration has largely reversed in the past nine months as international capital flows, driven by investment opportunities and returns, return to a more normal pattern.

There has been a continued increase in the costly build up of precautionary reserves as a form of self insurance against volatility in international capital flows.

With regard to the mobilization of international financial resources for development, we believe that international private capital flows, and in particular attracting foreign direct investment, is an essential complement to international and national development efforts.

Pick any indicator trade relative to global GDP, capital flows relative to the global capital stock, and so forth all are rising.

The International Monetary Fund has put its stamp of approval on capital controls, thereby legitimizing the use of taxes and other restrictions on cross border financial flows.

The Bretton Woods GATT regime entailed a shallow form of international economic integration that implied controls on international capital flows, which Keynes and his contemporaries had viewed as crucial for domestic economic management.

Strauss Kahn s response that taxes on capital flows are costly and ineffective is therefore unfortunate.

Witness the surge in capital flows to emerging markets as investors chase higher financial returns.

(iv) Initiate measures that mitigate the impact of excessive volatility of short term capital flows.

Capital controls, whatever their benefits in terms of mitigating the risks associated with volatile capital flows, are costly in a variety of ways.

The taboo that has attached to capital controls has discouraged practical, policy oriented work that would help governments to manage capital flows directly.

Referring to capital controls, John Maynard Keynes famously said what used to be heresy restrictions on capital flows is now endorsed as orthodoxy.

Private capital, which accounts for more than 90 of capital flows to developing economies, will remain the dominant source of long term financing.

Since there were no substantial capital flows for a long time, this did not matter at first. Then, in the 1970's, capital flows started up again, and there were again threats to the stability of the system.

This has increased the vulnerability of many emerging markets to a sharp reversal in capital flows.