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

Financial flows are excessively 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.

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

Capital flows

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.

50. The expansion of capital flows, including ODA, other official capital flows and private capital, was essential.

Capital flows and remittances

Capital flows and errors

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

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.

C. Investment and capital flows

Official flows are an important supplement to private capital flows.

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.

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

Encouraging private capital flows and remittances

Afterward, capital flows to developing countries stagnated.

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.

E. The international environment Financial liberalization and capital flows

Table 2 Private capital flows to Africa, 1998 2003

Policies to counter pro cyclicality of international capital flows

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.

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

In 2003, net private capital flows to developing countries had remained positive and continued to be the largest component of capital flows to such countries.

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

Prudential controls on capital flows make a lot of sense.

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.

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.

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

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.

22. The net transfer of resources to the developing countries had been concentrated in only a few countries and for the most part involved flows of private capital that were very volatile because of exchange rate fluctuations and interest rate changes in the countries in which such flows originated.

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.

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.

The global integration of trade and finance has facilitated these capital flows.

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.

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

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.

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.

Official development financing could play a catalytic role in encouraging such capital flows.