Additional investments in capital goods offer very low returns.

One might thus think that returns to capital are low in China.

Keeping interest rates low discouraged capital inflows and encouraged asset price inflation.

And equity capital requirements for large, systemically important financial institutions remain too low.

Because investment is so low, net capital exports from Germany are nearly 4 of GDP.

Banking supervisors did not deal with many institutions low levels of capital and poor asset quality.

When countries suffer from low investment demand, freeing up capital inflows does not do much good.

Judging by low stock prices and high capital outflows, investors were already betting against high growth rates.

Artificially low exchange rates, restrictions on capital flows, and excessively large currency reserves all create global imbalances.

In the last two years, bank credit has become the main source of capital in China a risky situation, given the low quality and inadequacy of bank capital.

The country s investment rate now stands at more than 50 a clear reflection of China s low capital efficiency.

The problem? An invasion of short term capital flows fleeing the slow growth, low interest rate advanced countries.

For nearly a decade, capital from high savings countries like Germany flowed to low savings countries like Spain.

At the same time, since returns to capital are kept low by high wages, very little investment occurs. The excess of savings over investment flows abroad as capital exports.

As the accumulation and deepening of capital accelerate growth, they perpetuate the low efficiency investment pattern and stimulate overproduction.

In the Basel III negotiations that concluded last year, the French and Germans strongly favored relatively low capital requirements.

Second, many argue that raising interest rates would trigger a flood of speculative capital from low yielding advanced economies.

However, China s large size and low per capita income and capital stock imply continued rapid growth in its demand for commodities.

Similarly, a potential downside to quantitative easing is that low interest rates send capital to higher growth, high interest rate countries.

Poor regions have a low base of economic activity to tax, which prevents them from investing in human and physical capital.

To manage exorbitant demand for financial and physical assets, China s leaders must address its root cause the low cost of capital.

Thus, it is not a good idea to run persistent current account deficits and become dependent on (temporarily) low cost foreign capital.

Capital tax differences among countries would induce capital to flow from the high tax to the low tax economies. Such tax induced distortions would lead to an inefficient regional allocation of investment and possible tax competition.

The region s economies are now cooling and incomes are flattening, and low cost capital inflows will no longer encourage public and private sector consumption.

But what exactly does this imply for how middle and low income countries today should set their capital account policies amid the current flood?

Those that do relatively well share three characteristics low levels of public debt, limited dependence on exports or capital flows, and robust democratic institutions.

Similarly, outsourcing to low wage countries improves living standards only if the human capital released can be used to make new goods and services.

In the Basel III negotiations that concluded last year, the French and Germans strongly favored relatively low capital requirements. This was folly for their big banks today, more capital would reduce the probability of needing further government bailouts.

China wants to shift from low value added, labor intensive industries such as textiles to higher value added sectors such as electronics and capital goods.

The World Bank estimates that natural capital constitutes a quarter of total wealth in low income countries, compared to 3 in the highly developed economies.

Prompted by capital flows to low wage countries, specialization, outsourcing, and even immigration, the equilibrium price of unskilled labor has fallen throughout the western countries.

Defenders of low rates for capital owners argue that it minimizes double taxation of corporate income first of the corporation and then of its shareholders.

The good times were also buoyed by easier access to low cost capital, much of which has come in the wake of the global financial crisis.

One of the most daunting challenges for poor countries is the need to accumulate investment capital under conditions of low savings without incurring too much foreign debt.

First, technological advances have rendered manufacturing much more skill and capital intensive than it was in the past, even at the low quality end of the spectrum.

Or perhaps the low cost of international capital will entice the US to absorb some of the world s excess savings, triggering a new period of global expansion.

Believers in low interest rates also emphasize shifts in income distribution in the United States away from labor and toward capital, which have greatly boosted firms' resources to finance investment internally and reduced their dependence on capital markets. They point to rapid technological progress, which has boosted output from new and old capital investments.

As China s demographic dividend disappears, its low end labor market is shrinking, driving up its once rock bottom labor costs and diminishing its rate of return on capital.

The key is to reflect on six kinds of capital goods business capital, infrastructure, human capital, intellectual capital, natural capital, and social capital.

First, they were trapped in a vicious circle of low income, low savings and low investment, leading to low productivity and low growth.

So a country where labor productivity is low will become an attractive location for foreign direct investment, and the resulting increase in the capital labor ratio will raise productivity.

This may be justified for a country on the verge of losing access to capital markets, but not for a country with relatively low debt and a moderate deficit.

And the low interest rates needed to maintain full employment would lead in time to the euthanasia of the rentier of those who live off the rents of capital.

Morocco boasts solid infrastructure, a robust banking system, sound public finances, low inflation, and manageable unemployment. Despite capital flight from much of the region, foreign investment continues to flow in.

Globalization has strengthened the ability of capital to flow to wherever investment promises the highest returns likewise, competitive manufactured products from low wage economies will flow in the other direction.