CAPITAL MOBILITYPOST WWII

IMPLİCATİONS OF CAPİTAL MOBİLİTY FOR GROWTH & STABİLİTY

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.

HİSTORY OF CAPİTAL MOVEMENTS

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. 1970s: Measures limiting capital account

transactions were then progressively relaxed and lifted

CAPİTAL MOBİLİTY A Growth Engine?

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? 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.

LENDİNG BOOMS İN 20TH CT.

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

CHARACTERİSTİCS OF LENDİNG 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.

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…

CHARACTERİSTİCS OF LENDİNG BOOMS -2-

Lending Booms have tended to occur under supportive political conditions: 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

CHARACTERİSTİCS OF LENDİNG 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…

DEBATE ON GLOBAL FİNANCE

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, Most costs and risks fall on developing countries

Rationalist approaches to explain financial globalisation

HOW EXTENSİVE İS FİNANCİAL GLOBALİSATİON?

Average daily turnover in spot forex markets is $1.2 trillion,

Average daily turnover in derivatives markets $1.4 trillion,

BIS, 2001

MEASUREMENT OF FİNANCİAL INTEGRATİON -1-

Measure the correlation between national saving and investment,

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,

Despite removal of Capital Controls, correlation remained surprisingly high in DEVELOPED Countries.

Still a trend towards greater financial integration among advanced industrial countries…

MEASUREMENT OF FİNANCİAL INTEGRATİON -2-

Use of Capital Controls at the National Level; Available data in the IMF Annual Report on Exchange

Rate and Monetary Arrangements,

Demonstrate a clear trend towards greater financial openness in many countries,

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…

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.

CONTRASTİNG PRE-1914 PERİOD WİTH TODAY 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.

EFFECT OF FİNANCİAL INTEGRATİON ON NATİONAL POLİCY AUTONOMY

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,

FİNANCİAL OPENNESS İN DEVELOPED VS. DEVELOPİNG COUNTRİES

Increased potential for financial crises in developing countries, 1994 – 2002 period, from Mexico to East Asia, Russia, Brazil, and Argentina..

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..

FİNANCİAL OPENNESS İN DEVELOPED VS. DEVELOPİNG COUNTRİES

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..

ORİGİNS OF FİNANCİAL GLOBALİSATİON -1-

Three dominant approaches in the literature:

Technological Determinism Approach

Hegemonic Power Approach

Rational Interest Groups Approach

ORİGİNS OF FİNANCİAL GLOBALİSATİON -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.

ORİGİNS OF FİNANCİAL GLOBALİSATİON -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

ORİGİNS OF FİNANCİAL GLOBALİSATİON -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.