Transcript CAPITAL MOBILITY

CAPITAL MOBILITY
POST WWII
IMPLICATIONS OF CAPITAL MOBILITY FOR
GROWTH & STABILITY
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Destabilising Capital Flows (Nurkes,1920s)
Keynesian Efforts to construct an international
regime with limits on capital mobility following
WWII
Some positive welfare effects:
Foreign capital may augment domestic savings,
 May be a conduit for technology transfer,
 May be a source of discipline on policy makers.
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HISTORY OF CAPITAL MOVEMENTS
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Before 1914: Free flows across borders reached levels
never achieved again,
1920s: Policy makers aspired to reconstruct
international financial markets and transactions
along prewar lines, but no success,
1930s: Capital markets collapsed with the Great
Depression,
Currencies forced off the Gold Standard,
 Countries defaulted on their debts,
 Governments maintained tight restrictions on
international financial transactions.
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1970s: Measures limiting capital account transactions
were then progressively relaxed and lifted
CAPITAL MOBILITY
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A Growth Engine?
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Resource mobilisation conveys technological and
organisational knowledge and catalyse institutional
change => Funds must be encouraged to flow from
capital – rich to capital – poor economies!
A Source of Instability?
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International capital movements are especially
volatile, bacause information asymmetries are
greatest when lenders and borrowers are separated
by physical and cultural distance. Capital flows may
crash down the entire financial infrastructure =>
Economies must be insulated from this risk by
strenghtening prudential supervision and limiting
recourse to especially volatile forms of foreign
funding.
LENDING BOOMS IN 20TH CT.
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1880 – 1913: Largest flow of capital, 3.5% of
GDP,
Post WWI: 2.5% of GDP, relying on Bond finance,
Years of PetroDollar recycling that ended with
Mexican Crisis of 1982: relying on Bank finance,
1990s: Bond and Equity investments + steady
increase in FDI
CHARACTERISTICS OF LENDING BOOMS -1
Lending Booms have tended to occur during
the upswing of the Global Business Cycle:
In the 1920s, capital exports from the US responded to the
legacy of WWI,
 After 1973, flows to L.America & Asia responded to
improving growth performance and declining trade
barriers.
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Lending Booms have tended to occur in periods
of expanding world trade:
Trade and Lending goes hand in hand: Prior to WWI,
transport costs fell, governments adopted trade – friendly
policies, and share of exports in GDP nearly doubled.
 Although the oil schocks produced BoP problems, world
trade btw. 1973 – 1981 expanded around twice as fast as
world income.
 In 1990s, multilateral and regional trade liberalisation
initiatives…
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CHARACTERISTICS OF LENDING BOOMS -2
Lending Booms have tended to occur under
supportive political conditions:
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In 19th ct, the British Empire was a political, defence,
economic and financial block.
Paris, Berlin and Washington used political pressure and
sactions to encourage debtors to meet their contractual
obligations,
In 1920s, reconstruction and development loans by US and
UK gov’ts
Post 1973, surge of syndicated bank lending, when the
developing country debt crises threatened the stability of
the US Banking system, (Brady Plan: creation of Dollar
Denominated bonds issued by L.American countries).
1990s, explosion of lending to emerging markets responded
to the collapse of Soviet Block, to economic and financial
liberalisation in developing and transition economies
CHARACTERISTICS OF LENDING BOOMS -3
Lending Booms have been associated with
financial innovation:
In the late 19th ct, and 1920s the development of
financial institutions stimulated lending booms:
French Banks established risk assesment
departments, Australian banks opened branches in
Britain, European and US investment banks issued
bonds, US banks branched abroad, investment trusts
diversified services…
 In 1970s, growth of Eurodollar market and the
relaxation of capital controls increased the bank
syndicates,
 1990s, securitisation of bank claims, emerging
market segment of the hedge fund industry…
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DEBATE ON GLOBAL FINANCE
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Arguments:
There has been a dramatic increase in the level of
financial integration since breakdown of Bretton
Woods System in 1970s,
 The extent to which financial globalisation
constraints national policy autonomy => depend on
national institutional structures
 Financial globalisation has little effect but emerging
international financial structure constrain
governments in an unequal manner,
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Most costs and risks fall on developing countries
Rationalist approaches to explain financial
globalisation
HOW EXTENSIVE IS FINANCIAL
GLOBALISATION?
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Average daily turnover in spot forex markets is
$1.2 trillion,
Average daily turnover in derivatives markets
$1.4 trillion,
BIS, 2001
MEASUREMENT OF FINANCIAL
INTEGRATION -1
Measure the correlation between national
saving and investment,
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In a world of perfectly integrated financial markets,
national investment need not depend upon the flow of
national savings since countries can borrow from abroad,
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Despite removal of Capital Controls, correlation remained
surprisingly high in DEVELOPED Countries.
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Still a trend towards greater financial integration among
advanced industrial countries…
MEASUREMENT OF FINANCIAL
INTEGRATION -2
Use of Capital Controls at the National Level;
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Available data in the IMF Annual Report on Exchange
Rate and Monetary Arrangements,
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Demonstrate a clear trend towards greater financial
openness in many countries,
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Problems: data do not distinguish btw. forms of exchange
control, nor takes into account other kinds of barriers to
market integration, i.e. national tax regimes, portfolio
capital flows…
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The measure describes national policies rather than the
degree of global integration. Some nations’ policy choices
are more effective on global integration, i.e. U.S.
CONTRASTING PRE-1914 PERIOD WITH
TODAY
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Since 1973 US took the lead in removing capital
controls,
L. America and E. Asia also removed many capital
controls in the late 1980s,
Level of contemporary financial integration falls short
of pre-1914 period,
Still the degree of financial integration is both
different and deeper than which prevailed before the
WWI,
Ratio of short-term capital flows to long term flows is much
higher today,
 Investors prefer bonds to equity
 Increased information
 Different kinds of financial product and many currencies.
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EFFECT OF FINANCIAL INTEGRATION ON
NATIONAL POLICY AUTONOMY
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No clear evidence toward less activist fiscal and
monetary policies, or any shrinkage of the
welfare state and capital taxation,
On the contrary, since 1970s, shift to floating
exchage rates has probably increased rather than
decreased macroeconomic policy autonomy.
G/GDP rose steadily from 12% in the early 60s, to
15% in the late 90s,
 Government Borrowing in Developing Countries have
increased continously,
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FINANCIAL OPENNESS IN DEVELOPED VS.
DEVELOPING COUNTRIES
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Increased potential for financial crises in
developing countries, 1994 – 2002 period, from
Mexico to East Asia, Russia, Brazil, and
Argentina..
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Banks based in developed countries were willing to
lend to these countries before mid-1997, but they
tended to do so in $ or Yen, often at short maturities.
When banks withdrew credits and helped to
precipitate the crises, IMF-led international rescue
efforts ensured that international banks were repaid,
exception for partial Russian debt..
FINANCIAL OPENNESS IN DEVELOPED VS.
DEVELOPING COUNTRIES
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Financial openness for the developed countries
allowed them to borrow from international investors
by selling domestic currency-denominated financial
assets, which does not entail the currency risk
incurred by emerging market borrowers..
It is not a surprising evidence that capital account
liberalisation boosts growth in high income countries,
but slots it in low income countries..
Still there’s a movement towards more liberalisation..
ORIGINS OF FINANCIAL GLOBALISATION -1
Three dominant approaches in the literature:
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Technological Determinism Approach
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Hegemonic Power Approach
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Rational Interest Groups Approach
ORIGINS OF FINANCIAL GLOBALISATION -2
Technological Determinism: explains financial
globalisation as the product of technological
changes that are gradually sweeping aside
barrierrs to the integration of national financial
markets. Political factors may help explain the
detail and timing of liberalisation, but essentially
liberalisation is driven by factors exogenous to
the political system.
ORIGINS OF FINANCIAL GLOBALISATION -3
Hegemonic Power: argue that financial
globalisation is a product of dominant political
forces. These may be in the form of a hegemonic
power that promotes financial liberalisation
abroad (USA), and/or in the form of a set of
hegemonic ideas (market neoliberalism) that
shapes the assumptions and choices of policy
makers
ORIGINS OF FINANCIAL GLOBALISATION -4
Rationalis Interest Group: focus not on structural
forces and state policy makers but on the
preferences of key societal interest groups. From
this perspective financial liberalisation occurs
when groups that favour liberalisation organise
and lobby more effectively that groups that
oppose it.