Italy’s Lost Decades: Trade, Capital Flows, and Currency Crisis, 1861–1883

THE recent focus of radical economists such as Thomas Weisskopf (1972) and Keith Griffin (1970) on the possible reduction in domestic savings caused by aid inflow has raised an important issue: How much does this matter?' A characteristic answer by orthodox economists would be that increased current consumption is also welfare-improving. Hence, the evidence of reduced domestic savings following on the influx of foreign capital -or, what is the same thing, the evidence that aid is only partially used for investment -may be dismissed as interesting but irrelevant to the discussion of the benefits of aid programmes.2 But, while the radical economists have not systematically spelled out an argument to sustain the thesis that a reduction of domestic savings by foreign capital is harmful, it is clear that their concern arises from the notion of dependence: in particular, that reduced savings would somehow increase on the aid-giving country (which is likely to be part of the imperialist or the social-revisionist bloc). This dependence argument can indeed be formalised. Take a typical Harrod-Domar type model and define the capital-recipient country's objective as reaching a Millikan-RosensteinRodan-Rostow self-reliant growth rate by raising its domestic savings rate to a target level. The radical case can then be constructed by examining whether, in reducing domestic savings, an influx of foreign capital postpones, or renders infeasible, the reaching of self-reliance. (Needless to say, dependence can only be one dimension out of many that would enter a complete social welfare function; but it is certainly one that has to be formalised, as here, before it can be usefully discussed.) Two things are clear as soon as the problem of dependence is defined in this way. First, whether capital inflow creates will depend on the assumed parameters of the model as well as the targeted level of the savings rate and the time by which it must be achieved. Contrary to the radical notions, an aid programme may achieve a targeted increase in the savings rate earlier than in the absence of aid, or may make an infeasible target a feasible one. Second, it is therefore useful to take estimates of the parameters involved and to examine simulation runs to see whether the radical concerns are worth bothering about. It is our intention to derive the logical implications of such savings behavior in a dynamic framework to see where it can lead. This paper constructs a simple version of the Harrod-Domar model and discusses the simulation runs of savings and the savings ratio, with and without aid, for a number of less developed countries (LDCs). These countries are those for which Weisskopf (1972) has fitted savings functions, using time series analysis, so that we have had to add only plausible Received for publication March 19, 1975. Revision accepted for publication November 10, 1975. * The research underlying this paper was financed by the National Science Foundation. The facilities provided by the Institute for International Economic Studies, Stockholm, are also gratefully acknowledged. A companion paper by Bhagwati and Grinols (1975) which examines a different argument linking foreign capital inflow to and hence to the feasibility of transition to socialism has been published separately in the Journal of Development Economics. 1 The precise line of arguments developed below may be considered to be implicit in the concerns and writings of the radical economists, though we have not seen them carefully developed and stated. The focus in many of the radical writings is rather on the inadequacy of the early aid-requirements estimates, where the analyst assumed a Harrod-Domar model and a realistic capital-output ratio, fixed a target rate of growth to get a target rate of investment, then made a Keynesian savings assumption and came out with the estimate of aid or capital inflow required to fill the gap between the required investment and the available domestic savings. This method, along with alternative approaches, is reviewed in Bhagwati (1971). If the aid inflow itself affects domestic savings, the model is clearly specified incorrectly. To be fair, however, to the economists (such as Rosenstein-Rodan) who used the approach being criticised, they thought of the Keynesian domestic savings function as one which the economy would adhere to (via tax effort, for example) as part of its matching effort while receiving the capital inflow, so that it was a policy function rather than a behavioral function as implied by the radical writings. 2 Following this line of argument, the radicals should focus on the distribution of benefits from additional consumption instead of on whether such additional consumption follows on the capital inflow.

There is no dearth of literature on foreign capital inflows into East Asia. Direct foreign investment has attracted a vast amount of attention, but aid flows were an important area of analysis in the 1950s and 1960s, and during the last decade attention has shifted to bank flows and the ensuing debt issues. The large volume of writing has not, however, led to clear hypotheses about the role of foreign capital inflows in East Asia's industrialization or growth. Typically of capital flow information, the data base is conceptually and statistically weak (Table 4.1) so that attempts at quantitative empirical analysis have usually foundered or led to conflicting results. Much of the empirical literature is accordingly devoted to the microeconomic costs and benefits of capital inflows, but these are not linked to the key host and home country policies that determine their incidence and magnitudes. Although the East Asian countries represent a growing economic entity in the world economy, notably with respect to trade, in relation to global capital flows they have been to date a ‘small country’. As international capital markets developed after the Second World War, the supply of capital for international flows was largely determined by the industrial countries. ‘Low absorption’ petroleum exporters added to supply from the mid-1970s, and other developing countries including some in East Asia began to contribute to as well as borrow from international capital markets. But the East Asian countries have mainly been capital importers and price takers in the international market for capital.

PurposeThe authors investigate the impacts of international capital inflows on bank lending in the Association of Southeast Asian Nations-6 (ASEAN-6) countries on the dynamics of both bank loan volumes and credit risk-taking. The authors further explore the heterogenous impacts of different components of the foreign capital. As a robustness check, the authors also examine the role of crisis periods and agency problem on the relationship between international capital inflows and bank lending.Design/methodology/approachThe authors explore the impacts of international capital inflows on bank lending in the ASEAN-6 countries, including Malaysia, Indonesia, Thailand, Philippines, Singapore and Vietnam. The authors employ quarterly data from 2005Q1 to 2021Q2 from 45 commercial banks in the ASEAN-6 countries. The article uses bank-fixed and time-fixed effects in the panel dataset to account for any unobserved heterogeneity.FindingsThe authors find that capital inflows to the ASEAN-6 countries are associated with higher bank loan growth and lower loan loss provisions to net interest income ratios. Moreover, the positive relationships between capital inflows to the bank loan growth and credit risk-taking are mainly driven by the dynamics in foreign direct investments (FDIs) and other inflow (OI) components. Contrary to the global financial crisis (GFC), the authors note that the mediating role of capital inflows on bank lending is of particular importance in the COVID-19 pandemic.Research limitations/implicationsThis study has some limitations that provide vendors for future research. First, while the authors focus on the impact of capital inflows on bank-level lending activities, future research can also explore the role of foreign capital on bank efficiency and financial stability. Second, although foreign capital fluctuates the most during crisis periods, the movement of capital inflows is also sensitive to other periods of heightened global uncertainty. Thus, rather than focus on the behavior of foreign capital during crisis periods, future research can examine and explore the impacts of capital inflows in different periods of “stop” and “surge” for sudden contraction and boom in capital inflows to the ASEAN-6 countries.Originality/valueFirst, the authors provide a comprehensive analysis of international capital inflows' impact on bank lending in the ASEAN region on both bank loan volumes and credit risk-taking. Second, the authors provide evidence of the impact of different forms of foreign capital on the bank lending. Third, the authors investigate the heterogeneous impact of foreign capital on crisis periods and bank sizes, which the authors emphasize the unusual characteristics of the COVID-19 crisis compared with the GFC.

The rapidly growing net inflow of capital from abroad, mirroring the extraordinary deterioration of the U.S. export-import balance, has played a major role in equilibrating overall saving and investment in the United States in the face of unprecedentedly large and persistent federal goverriment budget deficits during the 1980s. As a result of this capital inflow, the share of U.S. financial assets held by foreign investors is also growing rapidly. If the inflow continues, the increasing relative importance of foreign investors will in general change the equilibrium price and yield relationships determined in U.S. markets. In particular, because foreign investors, on average, hold far less of their portfolios in long-term debt instruments than do American investors, the increasing share of foreign ownership of U.S. financial assets is likely to raise the expected return premium on long-term debt, and hence to shift the composition of U.S. financial activity away from capital formation. Nevertheless, the foreign capital inflow -- and with it the U.S.export-import balance -- may change in response to a variety of possible influences, including U.S. fiscal and monetary policies. Empirical estimates based on reduced-form equations indicate that a tightening of U.S. fiscal policy would significantly stimulate U.S. capital formation, and would shrink the U.S. capital inflow (that is, improve the U.S. export-import balance) by even more. Analogous estimates indicate that an easing of U.S. money policy would also significantly stimulate capital formation and shrink the capital inflow, but with the relative magnitudes of the two effects approximately reversed.

The rapidly growing net inflow of capital from abroad, mirroring the extraordinary deterioration of the U.S. export-import balance, has played a major role in equilibrating overall saving and investment in the United States in the face of unprecedentedly large and persistent federal goverriment budget deficits during the 1980s. As a result of this capital inflow, the share of U.S. financial assets held by foreign investors is also growing rapidly. If the inflow continues, the increasing relative importance of foreign investors will in general change the equilibrium price and yield relationships determined in U.S. markets. In particular, because foreign investors, on average, hold far less of their portfolios in long-term debt instruments than do American investors, the increasing share of foreign ownership of U.S. financial assets is likely to raise the expected return premium on long-term debt, and hence to shift the composition of U.S. financial activity away from capital formation. Nevertheless, the foreign capital inflow -- and with it the U.S.export-import balance -- may change in response to a variety of possible influences, including U.S. fiscal and monetary policies. Empirical estimates based on reduced-form equations indicate that a tightening of U.S. fiscal policy would significantly stimulate U.S. capital formation, and would shrink the U.S. capital inflow (that is, improve the U.S. export-import balance) by even more. Analogous estimates indicate that an easing of U.S. money policy would also significantly stimulate capital formation and shrink the capital inflow, but with the relative magnitudes of the two effects approximately reversed.

“TRUE FINANCIAL OPENING UP”: THE ANALYSIS OF CAPITAL ACCOUNT LIBERALIZATION IN A GENERAL EQUILIBRIUM FRAMEWORK

This paper purports to show that even in a 2 × 2 full-employment production structure, an inflow of foreign capital may be welfare improving in the presence of labour market distortion. However, the existence of labour market distortion is a necessity to obtain this unconventional result. If an inflow of foreign capital is accompanied by labour market reform, the possibility of welfare gain due to foreign capital diminishes. Therefore, there may exist a trade-off between the policies of growth with foreign capital and labour market reform. However, if the inflow of foreign capital is accompanied by a labour-augmenting type technology transfer, it is found that investment liberalization policy and labour market reform may be undertaken concurrently in a developing economy.

Purpose The purpose of this paper is to investigate the impact of foreign capital shifts on economic activities and asset prices in South Korea. Design/methodology/approach The authors in this paper apply the Bayesian threshold vector autoregressive (TVAR) model to estimate the regimes of large and low inflows of foreign capital. Then, structural impulse-response analysis is used to check whether the responses of the variables differ across the estimated regimes. The model is estimated using quarterly data of foreign capital inflows, gross domestic product (GDP), consumer price index, credit to the private non-financial sector, real effective exchange rate (REER), stock returns and house prices. Findings The main findings suggest that large inflows of gross foreign capital, foreign direct investments (FDI) and foreign portfolio investments (FPI) are ineffective to boost economic growth, but large inflows of other foreign investments (OFIs) significantly contribute to GDP. The decreases in the foreign capital inflows are associated with larger depreciation of REER. The large inflows of gross foreign capital, FDI and OFIs are associated with further expansion of credit supply to private non-financial sectors. Research limitations/implications The policy implications of foreign capital inflows are of particular importance to all the emerging markets alike. However, the empirical analysis is limited to the case of South Korea due to various reasons. The experience with international capital inflows among emerging markets is heterogeneous. Therefore, it would be better to take each case of emerging market individually. In addition, TVAR analysis requires a long data sample, which unfortunately is not available for most of the emerging markets. Originality/value The foreign capital inflows are shown to be procyclical and notoriously volatile in many studies. Nevertheless, this topic has commonly been studied using linear VAR models, which do not properly deal with the cyclical characteristics of foreign capital inflows. This study attempts to resolve these methodological limitations by examining a non-linear VAR model that is capable of capturing the structural breaks associated with the cyclical behaviors of foreign capital inflows.

The resumption of capital flows to developing countries in the nineties is intertwined in the Brazilian case with the attempts to achieve inflation stabilization. A very restrictive monetary policy has offered probably the world's highest yield to fixed income investments. In the context of favorable external factors to capital flows, the huge interest rate differential caused massive short term capital inflows to Brazil. After 1995, foreign direct investment, mainly associated with the privatization process, has became more important as a source of foreign capital. During the first period, the magnitude of those flows exacerbated two main macroeconomic problems: an increase in the quasi-fiscal deficit due to the interest payments on the debt used to sterilize the inflows, and, after the Real Plan, also the overvaluation of the currency. The restrictions to capital inflows are described and analyzed, as well as the main engineering strategies used to circumvent the restrictions. Given the advanced stage of domestic financial markets--including a powerful derivatives market--the restrictions imposed have not been fully effective in preventing the inflows of short term foreign capital to invest in the high-yield-public debt, but they probably had a temporary effect. Given the small progress achieved so far in the fiscal side of the reforms, it is also doubtful that the capital inflows' restrictions have been effective in a broader sense, that of allowing the government to buy time to implement the essential structural reforms. By reducing the urgency of the politically costly structural reforms aimed at increasing domestic savings, capital inflows have detrimental incentive effects on the government's resolve to push forward the stabilization plan, as shown by the lack of commitment in carrying out the fiscal package promised during the Asian crisis. If the external finance package is successful in deterring the current daily losses of foreign reserves and in regaining the market's confidence, it remains to be seen if the current crisis was strong enough to make the newly reelected Brazilian government live up to its renewed promise of fiscal austerity.

The article summarizes current approaches to the theoretical substantiation of the effects of financial openness on emerging economies. The empirical data on the verifying financial openness effects, in particular the promotion of capital inflows into emerging economies and their productive development in the context of globalization processes, are analyzed. An attempt has been made to identify the influence of the interest rate factor on the direction of the redistribution of international capital flows. Generalized the patterns of the distribution of capital movement instruments depending on the level of development of financial institutions and signs of the capital flows' strong deformation impact on financial markets with underdeveloped institutional environment. As a result of the analysis, it was found that under the conditions of the new normality, characterized by an increase in the volume of free movement of volatile capital flows, an increase in the level of financial openness, contrary to theoretical provisions, does not directly cause the inflow of foreign capital. At the same time, attracting foreign capital on a free, unregulated basis has a limited impact on economic development and mainly finances only the existing, well-functioning, high-yield markets and industries. Contemporary realities and the approach to the evaluation of foreign direct investment as the most effective and less volatile instruments of attracting foreign capital do not correspond to the current state of things. In today's context, only a small part of the FDI arrive into the real sector, while the bulk of them are localized in high-yield segments of the financial markets and used for tax evasion. The lack of direct dependence of international capital flows on the spread of capital yields and the level of financial openness leads to the conclusion that, in addition to the classical factors, the drivers of foreign capital inflow include positive economic dynamics of the recipient country and presence of high-yield markets. At the same time, signs of sustainable economic growth or recession by themselves encourage capital inflow or outflow from the country. At the same time, the presence of a developed financial sector reduces the risks of instability and increases the investment component of financial openness. These conditions form an inverse relationship between macroeconomic dynamics, the level of development of the institutional environment and the change in the level of real financial openness of the economy.

The rapidly growing literature on public diplomacy and media focuses on the attempts of several countries to enter foreign markets by operating in English. This focus neglects the capital inflows in relation to the interconnection between the state, the media and the importance of the influx of foreign capital in public diplomacy. Through considering foreign capital inflow to the Chinese media market, this chapter explores the role of foreign direct investment in China’s media sector in relation to public diplomacy.

The article is devoted to changes that have taken place in the world economy and in the econo- mics, starting with the Great Depression of the 1930s to the contemporary Global Crisis. The author pays special attention to the phenomenon of free movement of capital across borders, which lead to weakening of the importance and role of the state.

In this paper, we shed some light on the mutual interplay of economic policy and the financial stability objective. We contribute to the intense discussion regarding the influence of fiscal and monetary policy measures on the real economy and the financial sector. We apply a factor-augmented vector autoregression model to Czech macroeconomic data and model the policy interactions in a data-rich environment. Our findings can be summarized in three main points: First, loose economic policies (especially monetary policy) may translate into a more stable financial sector, albeit only in the short term. In the medium term, an expansion-focused mix of monetary and fiscal policy may contribute to systemic risk accumulation, by substantially increasing credit dynamics and house prices. Second, we find that fiscal and monetary policy impact the financial sector in differential magnitudes and time horizons. And third, we confirm that systemic risk materialization might cause significant output losses and deterioration of public finances, trigger deflationary pressures, and increase the debt service ratio. Overall, our findings provide some empirical support for countercyclical fiscal and monetary policies.

Sangsubhan and Basri (2012) provide a detailed account of fiscal measures implemented by Thailand and Indonesia in response to the global financial crisis (GFC), and analyze the effectiveness of expenditure versus revenue-based measures in delivering GDP growth. They find that while the GFC's impact differed in each country, both countries entered the crisis with sufficient fiscal space, providing room for fiscal support for their respective economies. In Thailand, while targeted measures on expenditure were deemed effective, they were untimely, particularly when compared to quasi-fiscal measures such as credit expansion via specialized financial institutions. In Indonesia, in an environment characterized by lags in disbursement, tax cuts were deemed more effective than expenditure. However, their effectiveness diminishes when the tax cuts are targeted at the highest income earners or corporates. Sangsubhan and Basri conclude by noting the risk of a new normal of ‘stimulus expectations’ built into budgets which prevent fiscal balances from returning to their pre-crisis levels. This phenomenon has not been exclusive to these two countries. Both advanced and emerging markets have pursued expansionary fiscal policies, leading to narrower fiscal space across the board. Public debt-to-GDP ratios in the Eurozone economies have risen to levels well above 60 percent, with limited scope for consolidation in view of the sizeable budget deficits and the likelihood of GDP contraction in some economies. In East Asia, public debt-to-GDP ratios have also risen, with average public debt levels in the ASEAN-5 countries standing at around 46 percent of GDP, and expected to decline only gradually over time.1 In the light of the narrowing fiscal space and increasing fiscal demands, the need for effective policy becomes ever more critical. In tackling the question of effectiveness, Sangsubhan and Basris consider revenue and expenditure-based stimulus measures. In both Indonesia and Thailand, the relatively lower efficacy of expenditure-type measures stems from their longer implementation periods. Delays in the absorption of expenditure are becoming increasingly common among the major ASEAN economies due to delays in absorption, and a greater demand for rigorous public resource management and accountability, as well as tighter regulatory and environmental standards for large investment projects. Despite the importance of strategic fiscal spending in emerging markets in the form of gross fixed capital formation and infrastructure investment, there is a risk that revenue-based stimulus is preferred to expenditure-based stimulus on account of this perceived ineffectiveness. As pointed out by Budina and Tuladhar (2010),these longer-term investments tend to be overlooked in favour of stimulus measures that can be more quickly absorbed into the real economy, but have only short-term effects in boosting consumption. Policy measures such as the improvement of land acquisition laws need to be explored even in peacetime. While the immediate need for fiscal policy support seems to have diminished somewhat, developments in Europe and elsewhere will still need to be monitored carefully. Although conventional indicators do not suggest debt sustainability is an immediate cause for concern, East Asia remains vulnerable to shocks from advanced economies and, therefore, must manage its fiscal space and policy adjustments well. Any departure from fiscal policy support would need to be carefully evaluated with the following three considerations in mind. Firstly, in the short term, fiscal stimulus measures must be rolled back. In practice, however, revenue-based measures (tax cuts) are usually semi-permanent in nature and are difficult to unwind. Expenditure-based measures, in particular, discretionary spending, can be difficult to phase out, particularly if they take the form of pre-committed subsidies. In both Indonesia and Thailand, the removal of these subsidies (for example, fuel subsidies) have implications for inflation and can be politically sensitive. For the major ASEAN countries, however, implementation delays inherent in such expenditure-based measures could turn out to be a blessing in disguise, making exits easier. Secondly, it is important that medium-term plans for strong, sustainable and balanced growth must include prudent public debt management to ensure ample fiscal space for counter-cyclical policy responses to future shocks. A medium-term plan which is well communicated to the public is critical to ensure the credibility of medium-term debt sustainability, and to prevent a deterioration in fundamentals should interest rates or liquidity pressures rise. This will prove crucial as East Asian countries are looking to introduce and improve their social security systems in the near future. Thirdly, as has been highlighted in the case of Greece, the accuracy and credibility of data as well as the transparency of public finances need to be closely monitored and improved. Improved transparency will contribute to a clearer recognition of public liabilities, namely off-budget expenditures, government guarantees and expenditure through state-owned enterprises.

The role of foreign capital as a determinant of growth in the developing countries is a controversial subject. The controversy has sometimes been focussed on all foreign capital inflows and sometimes on its components, particularly foreign aid and private foreign investment. According to the orthodox position, see, for example, Rosenstein-Rodan [53] and Chenery and Strout [11], all capital inflows constitute net additions to an LDC’s productive resources, thus increasing its growth rate. The channel of this effect was sometimes in the spirit of the well-known Harrod-Domar model and at other times in terms of the ‘two-gap’ models, where these inflows facilitated and accelerated growth by removing foreign exchange and/or domestic savings gaps. This orthodox position was challenged by radical economists like Griffin and Enos [25] and Weisskoff [66], among others. According to their line of argument foreign capital inflows exercised a depressing effect on the savings propensities of the developing countries, thus leading to a reduction of the domestic saving rates and lower rates of capital formation and consequently lower rates of growth, once again along the lines of the Harrod-Domar model. Thus unlike the orthodox position, they took the view that foreign capital, in particular, foreign aid, was a substitute and not a complement to domestic savings. These two rather extreme positions were attacked by Papanek [45] who argued that truth was somewhere in between and proposed a more pragmatic and less doctrinaire approach to the question, which essentially boils down to saying that the data should be allowed to answer the questions in a suitably formulated model.