Damming Capital

The Capital Flow Conundrum

Capital flows and remittances

The portion of capital inflows that is not re exported represents net capital inflows.

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

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

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

Private capital flows play an increasingly important role in supplementing developing countries' domestic resources.

Investment and private flows

Brazil has been aggressive in terms of capital restrictions, twice increasing its tax on financial inflows.

Short term capital outflows, however, were considered to be the main reason for the outflow of capital. 117

True, private capital flows have surged in the wake of global liberalization and these countries privatization schemes.

One of them is a reserve requirement on cross border flows successfully implemented in Chile, Colombia, and elsewhere or, even better, on cross border liabilities. Taxes on inflows can play a similar role, as can minimum stay periods for capital inflows.

Encouraging private capital flows and remittances

In the long term, private capital flows other than FDI tended to be highly pro cyclical.

The first is the flood of short term capital heading their way.

Prudential controls on capital flows make a lot of sense.

17. In Latin America, the reversal in the trend of net capital flows in the 1990s included a considerable amount of capital repatriation.

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.

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

While some Latin American countries have experienced a sharp recovery in inflows of private capital, Africa has been by passed.

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

But the rise would most likely be offset by capital outflows, as looser capital controls would enable savers to escape the financial crisis.

Encouragement of capital inflows, especially by nationals working abroad, and discouragement of capital flight improvement in balance of payments satisfaction of critical needs.

In the few developing countries which had received large net flows of private capital, the progress towards a more stable domestic macroeconomic environment must be preserved, while simultaneously ensuring that a larger share of capital inflows was used to increase productive investments.

A. GENERAL FUND, WORKING CAPITAL FUND AND SPECIAL ACCOUNT

And they could eventually accumulate their own capital.

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

Another global financial crisis could disrupt short term capital inflows.

Mutual and other private sector funds require minimum terms for investments, and such mandatory lock up periods should be applied to capital inflows as well.

The sale of sovereign bonds under the fixed exchange rate regime put direct upward pressure on their yields, while sales of private securities by foreigners had a similar effect, but through indirect channels. Monetary tightening was forestalled only to the extent that another source of foreign capital (either private or ECB) could replace the outflow.

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

Ways must be found to tackle problems arising from the potential volatility of some private capital flows, which could have destabilizing effects on recipient countries.

The IMF also prefers CFMs to be temporary.

Sub theme 2 Trade, investment and private flows

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?

But it left cross border capital flows entirely off the agenda, as if they were not a part of finance.

But that is wrong. Inflation fell as a result of the crisis, which reversed the direction of capital flows.

Clearly, we need to get a better handle on what is driving these capital inflows.

2. The most dynamic components were private short term capital, including repatriation, and foreign direct investment.

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.

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

Direct interventions, restrictions on short term capital inflows, capital gains taxes, and stabilizing prudential banking regulations will all have to be considered.

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

Moreover, there is good reason to see inflows into emerging markets as an opportunity to strengthen domestic capital markets, rather than primarily as a threat to financial stability.