MPDD Seminar Series on
Capital flows in Asia-Pacific – Patterns, controls, bonanzas and sudden stops
Margit Molnar, Amornrut Supornsinchai, Yusuke Tateno
Macroeconomic Policy and Development Division, UNESCAP
Tuesday, 21 February 2012
MPDD Meeting Room
7th Floor Block B, Secretariat Building
The Asia-Pacific region has long been prone to volatile capital flows that have posed a challenge for authorities to cope with and occasionally led to payment difficulties dragging down exchange rates and spilling over to the real economy. The recent global crisis repeated past history, although most economies hard hit by the 1997-1998 Asian financial crisis have learnt a lesson and are now better prepared to face volatile capital flows.
The region appears an attractive destination for capital owing to its high growth potential and relative economic stability. Many countries need the inflows of foreign capital to finance investment in excess of their savings, however, even countries with large current account surpluses benefit from the diversification effects of financing sources. Owing largely to the diversity of regional economies in terms of their level of economic development, orientation of economic activities and depths of financial markets, there is a large variation in the size of capital flows across countries. At one extreme the region includes financial centers handling capital flows several times of their GDPs, while at the other such flows are negligible relative to the size of the economy or the financial sector. The region also exhibits a high degree of variation in terms of types of capital flows. While most economies try to attract FDI (foreign direct investment) to benefit from its relative stability and other positive effects such as employment creation and technology/knowledge spillovers, some economies register most of the flows in their financial accounts. Furthermore, some countries experience the flows primarily in their debt or equity markets while in others financial institutions and firms are heavily involved in cross-border lending/borrowing activities. To effectively deal with sudden flows of capital, it is indispensable to identify the factors driving such flows. Moreover, different types of capital may be attracted by different settings; thereby a disaggregated analysis is necessary. In particular, the effect of different types of flows may vary, with debt-type of flows being most harmful owing to their pro-cyclical nature.
In addition to the economic environment, the regulatory environment governing capital flows is also crucial in driving such flows. While the Asia-Pacific region has attracted worldwide attention with its introduction of capital controls to counteract sudden changes in the direction of flows and lengthen the maturity of inflows, this general perception masks large differences across countries. Some countries in the region do not impose controls virtually on any type of capital; others restrict all types of flows. The gauging of controls across countries and over time provides an important insight into the potential direction and effects of flows. It is again useful to look at capital controls by type rather than aggregate restrictiveness.The evolution of restrictiveness of capital control measures reveals that after a liberalisation wave in the early 2000s, several countries strengthened their controls on capital flows. This is reflected, for instance, in the measures aiming at controlling bond flows and also in the aggregate inflow measure.
Density of overall capital inflow restriction measures
A natural question the introduction of capital controls in many countries raises is how effective they have been in curbing volatile capital flows. Assessing past experience of Asia-Pacific economies with such measures may be useful when considering the adoption of such measures. Preliminary results show that with overall stringent controls on capital flows, sudden and large capital inflows can be avoided. Specific types of capital flows can be made less volatile by targeting them: for equity inflows, for instance, the most effective measure is to restrict the sale and issue of securities abroad by residents.
The purpose of this paper is threefold: (i) to gauge the extent of capital flows and identify patterns across countries and types of flows, (ii) to assess the degree of countries’ openness to capital flows and its variation across countries and over time and (iii) to investigate what types of factors – including different types of controls on the flow of capital – drive sudden changes in various types of inflows and outflows.
You and your colleagues are cordially invited to attend the seminar and particpate in the discussions.