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

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

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

Financial flows are excessively volatile.

Volatile capital flows induce volatility in the recipient economy, making booms and busts more pronounced than they would otherwise be.

Unlike capital flows, which vary according to the economic environment, remittances tend to stay stable and are less volatile over time.

However, these flows tend to be more volatile than official flows and pro cyclical.

Financial flows are excessively volatile. Emerging countries are inundated with capital inflows one day, and faced with abrupt and equally destabilizing outflows the next.

Capital flows

The latter course risks the worst of all worlds all of the costs of capital controls and all of the domestic policy complications from volatile capital flows, but few of the potential benefits of foreign capital.

Second, there are policy failures, which occur when undisciplined macroeconomic policies and inconsistent or ineffective financial regulatory policies heighten the risks associated with volatile capital flows.

Capital flows and remittances

C. Investment and capital flows

In a global financial upheaval like our most recent one, capital flows shift abruptly and dramatically, causing credit, financing, and balance of payments problems, as well as volatile exchange rates.

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

Encouraging private capital flows and remittances

Let me spell out what this means for three policy objectives building a stronger and safer financial sector, achieving more balanced and more stable growth, and managing large and volatile capital flows.

Moreover, unlimited quantitative easing by the Bank of Japan, the Federal Reserve, and the European Central Bank also increases the risk of volatile capital flows and asset bubbles in Asian emerging economies.

Afterward, capital flows to developing countries stagnated.

15. Underlines the importance, for the improved access of developing countries to international financial markets, of considering counter cyclical macroeconomic policies in the face of volatile capital flows and of strengthening macroeconomic stability

Given an expanded mandate and a much larger balance sheet, the International Monetary Fund, with advance notification, could in principle reliably act to stabilize volatile international capital flows, buying time for more orderly domestic responses.

E. The international environment Financial liberalization and capital flows

Table 2 Private capital flows to Africa, 1998 2003

Another big change has come from fast growing emerging market countries, many of which, facing a wall of money coming their way from slow growth advanced countries (and mindful of the costs that large and volatile capital flows can bring), have chosen to apply capital controls.

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

It is now in the process of being better funded, but we are eight months into a crisis in which international capital flows became volatile and were driven largely by emergency responses rather than underlying economic fundamentals.

Emerging market policymakers believe that they lack recourse to safety nets that would cushion the impact of volatile flows.

Prudential controls on capital flows make a lot of sense.

But private capital flows have proven to be volatile and prone to sudden interruptions, as exemplified by the Asian and Russian financial crises of the late 1990 s, or more recently by investors pulling out from infrastructure sectors.

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.

Net portfolio flows displayed in the table have also been volatile and, since 2000, appear to have turned significantly negative.

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.

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

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

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

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.

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.

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

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

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.

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.