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Staff Discussion Notes showcase the latest policy-related analysis and research being developed by individual IMF staff and are published to elicit comment and to further debate. These papers are generally brief and written in nontechnical language, and so are aimed at a broad audience interested in economic policy issues. This Web-only series replaced Staff Position Notes in January 2011.
This book analyzes the process of international financial integration and the structural forces driving private capital to developing countries. Against this background, it details the potential benefits of integration and the implications of fast-moving global capital flows for emerging economics. Examining the experience of countries that have attracted substantial private capital flows, the book provides invaluable guidance as to what works and what doesn't during the transition to financial integration. It will be of compelling interest to policymakers and also to international investors and bankers, financial analysts, and researchers.
“The crisis has deeply impacted virtually every economy in the world, and although growth has returned, much progress in the fight against poverty has been lost. More difficult international conditions in the years to come will mean that developing countries will have to place even more emphasis on improving domestic economic conditions to achieve the kind of growth that can durably eradicate poverty.� —Justin Yifu Lin, Chief Economist and Senior Vice President The World Bank 'Global Economic Prospects 2010: Crisis, Finance, and Growth' explores both the short- and medium-term impacts of the financial crisis on developing countries. Although global growth has resumed, the recovery is fragile, and unless business and consumer demand strengthen, the world economy could slow down again. Even if, as appears likely, a double-dip recession is avoided, the recovery is expected to be slow. High unemployment and widespread restructuring will continue to characterize the global economy for the next several years. Already, the crisis has provoked large-scale human suffering. Some 64 million more people around the world are expected to be living on less than a $1.25 per day by the end of 2010, and between 30,000 and 50,000 more infants may have died of malnutrition in 2009 in Sub-Saharan Africa, than would have been the case if the crisis had not occurred. Over the medium term, economic growth is expected to recover. But increased risk aversion, a necessary and desirable tightening of financial regulations in high-income countries, and measures to reduce the exposure of developing economies to external shocks are likely to make finance scarcer and more costly than it was during the boom period. As a result, just as the ample liquidity of the early 2000s prompted an investment boom and an acceleration in developing-country potential output, higher costs will likely yield a slowing in developing-country potential growth rates of between 0.2 and 0.7 percentage points, and as much as an 8 percent decline in potential output over the medium term. In the longer term, however, developing countries can more than offset the implications of more expensive international finance by reducing the cost of capital channeled through their domestic financial markets. For more information, please visit www.worldbank.org/gep2010. To access Prospects for the Global Economy, an online companion publication, please visit www.worldbank.org/globaloutlook.
After being excluded from ...
June 1995 After being excluded from world capital markets during the debt crisis, many developing countries have experienced large capital inflows in the past five years. The challenges these inflows pose for domestice policy have generated a substantial literature. The authors review and extend that literature. They characterize the new inflows, assess their causes and the likelihood of sustainability, analyze the policy issues they raise, and evaluate the possible policy responses. Their conclusions tie desirable policy responses to characteristics of both the flows themselves and to those of the recipient economy. Regarding the forces driving the current episode, they conclude that generally, the role of foreign interest rates as a push factor driving capital inflows and determining their magnitude has been well-established. On the other hand, country creditworthiness has helped determine both the timing and destination of the new capital flows. Even if creditworthiness is maintained, the early level of inflows is unlikely to be sustained. The pace of reduction in flows to countries that have been receiving them since the early 1990s depends on the path of foreign interest rates and the role of stock adjustment. But a loss of creditworthiness caused by a deterioration in domestic policy would stop inflows quickly and, depending on the circumstances, inflows may be replaced by substantial outflows and an outright balance of payments crisis. What are the implications for policy in recipient countries? Briefly, the receipt of capital inflows may strengthen the case for removing macroeconomic distortions, either because such inflows aggravate the cost of such distortions or because they ease the constraints that originally motivated their adoption. While direct intervention may not be feasible (because controls may be easily evaded), controls may sometimes be a second-best policy. To the extent that capital inflows are permitted to materialize, the desirability of foreign exhcange intervention depends on what is required for macroeconomic stability. Sterilized foreign exchange intervention to prevent overstimulation of demand with a fixed exchange rate may not be feasible or effective. A commensurate reduction in the money multiplier, achieved by increasing reserve requirements, may also have limited effects. The effectiveness of both measures depends on the structure of the domestic financial system. If domestic monetary expansion is not avoided, or if an expansionary financial stimulus is transmitted outside the banking system, the stabilization of total demand will require fiscal contraction.
This paper assesses empirically the key drivers of private capital flows to a large sample of emerging market economies in the last decade. It analyzes the effect of the global financial cycle, measured by the VIX, on capital flows and investigates the role of fundamentals and country characteristics in mitigating or amplifying its effect. Using interaction models, we find the effect of the VIX to be non-linear. For low levels of the VIX, capital flows are driven by fundamental factors. During periods of stress, the VIX becomes the dominant driver of capital flows while other determinants, with the exception of interest rate differentials, lose statistical significance. Our results also suggest that the effect of global financial conditions on gross private capital flows increases with the host country’s level of financial sector development. Finally, our results imply that countries cannot fully insulate themselves from global financial shocks, unless creating a fragmented global financial system.
The book provides one of the most detailed and comprehensive reviews of the growth experience of a group of low and middle income countries before and during the global crisis. It then explores their growth prospects after the recovery and how they may be shaped by the new global economic environment.