Cross-border Capital Flows Research Articles

Economic Performance in Post-Crisis Korea: A Critical Perspective on Neo-Liberal Restructuring

This paper evaluates the neoliberal economic restructuring process implemented in Korea following the 1997 Asian financial crisis. We first argue that the austerity macroeconomic policy of late 1997 and early 1998 was the main cause of the economic collapse in 1998, and that the decision of the IMF and President Kim Dae Jung to impose a radical neoliberal transformation of financial markets and large industrial firms in the depressed conditions of 1998, though defensible on political grounds, made the failure of these reforms virtually inevitable. A detailed analysis of the macro economy, labor markets, financial markets, and nonfinancial firms in Korea in the past three and one-half years shows that neoliberal restructuring has created a vicious cycle in which a perpetually weak financial sector fails to provide the capital needed for real sector growth, investment and financial robustness, while real sector financial fragility continuously weakens financial firms. Neoliberal policies may have pushed Korea onto a low-investment, low-growth, development path, one with rising insecurity and inequality. Meanwhile, the removal of virtually all restrictions on cross-border capital flows has led to a dramatic increase in the influence of foreign capital in Korea's economy. The paper concludes by arguing that Korea should reject radical neoliberal restructuring and instead adopt reforms designed to democratize and modernize its traditional state-guided growth model.

A Turning Point for Globalisation? The Implications for the Global Economy of America's Campaign against Terrorism

Did September 11th herald a turning point for globalisation? Although America's campaign against terrorism could put at risk many of the gains globalisation has brought, the new environment likewise presents opportunities to smooth the rough edges of the globalisation associated with American policies of the past decade. Measures to tighten the security of cross-border flows of goods, people, information and capital may raise entry barriers still higher for poor countries seeking greater integration with the global economy. But September 11th also provided a wake-up call, alerting the wealthier nations and especially Americans to the direct link between their own well-being and ensuring that people around the world have a stake in the international system. Unfortunately, there is little evidence so far these lessons have been taken to heart in policies on trade, financial assistance, and advancing economic reform in the states of the Middle East.

Deluge or dribble? EU pension reform and real estate investment flows

AbstractThis paper assesses the implications of increases in private pension provision within the European Union (EU) for the level and destination of real estate investment. The first part discusses the increasing ‘institutionalisation’ of the savings markets, current asset allocation patterns and demographic and fiscal pressures for reform of pensions markets. The projections for future growth in pensions are outlined and implications for real estate investment assessed. It is concluded that, although numerous imponderables render reliable quantitative projections problematic, growth and restructuring of the pensions market is likely to increase cross‐border capital flows to real estate markets. However, current projections imply limited growth of direct real estate investment. Copyright © 2001 Henry Stewart Publications

World capital markets: challenge to the G-10

It has been consistently pointed out that every bad borrower, and for every failed project, there is also a culpable lender or investor. This observation lends itself to the current debate within the capital markets of the G-10 nations of whether private sector players should bear greater responsibility and the costs of managing crises when they occur. In analyzing the of the new international financial architecture, critics have thus far devoted enormous attention to the demand side - structural weaknesses in emerging markets and ineptitude of the IMF - an understandably relaxed attitude since the G-10 nations were hardly affected by the crises of 1997-98. This study identifies and seeks to bridge an unconnected pipe in the plumbing by examining the supply side. How can G-10 capital suppliers reform their system to contribute to a safer world of capital mobility? Hufbauer and Dobson draw a big picture of the international capital markets through a comprehensive coverage of capital flows and the balance between costs and benefits of cross-border capital flows, as well as the market players driving them. The authors call for reforms in the context of inherent volatility in bank lending and portfolio investment, recommending specific measures and their implications for changing the rules of the game.

Some Remarks on Japanese Finance, Growth and International Integration

Abstract Despite the fact that the last century was characterized by an impressive increase of cross-border capital flows, Japan remained a relatively closed economy up to the late 90s. Only when the “bubble” burst was the impetus given for more rapid opening up of the economy and the closely related liberalization of the financial sector. In general economic theory sees international financial market integration as an important instrument for increasing economic productivity. Japan, however, remains mired in an ongoing deep financial crisis even following the implementation of this measure. To understand this phenomenon better, this paper connects ideas from endogenous growth theory with the introduction of new rules of the economic game on the financial market. It can be demonstrated empirically that in Japan, the “old” internal institutions on the financial market have continued to exist even after the change in external institutions. Against the backdrop of these tensions, it is unlikely that the form...

Domestic Political Institutions and Exchange Rate Commitments in the Developing World

Policymakers use a fixed exchange rate regime to signal their commitment to low inflation and to exchange rate stability. Increasing economic integration and the rise of democratic institutions make it more difficult for policymakers to maintain the credibility of this commitment. We use binary probit (with a variety of corrections for autocorrelated and heteroscedastic disturbances) to test hypotheses relating democratic institutions to exchange rate regime choice on a sample of 76 developing countries over the period 1973‐1994. The empirical analysis indicates that domestic political preferences—as measured by the structure of domestic political institutions and the fractionalization of the party system—influence exchange rate regime choice. We find that floating exchange rate regimes are more likely in democratic than in nondemocratic polities and that democratic polities with majoritarian electoral systems are more likely to fix their exchange rates than those with systems of proportional representation. The growth of international capital markets is truly extraordinary. Cross-border capital flows dwarf those of international trade: recent estimates suggest that foreign exchange trading alone now exceeds one trillion dollars a day. The magnitude and volatile nature of international capital flows has led some political economists to suggest that increased economic integration and capital mobility has become so pervasive that it now acts as a “structural characteristic of the international system, similar to anarchy” (Keohane and Milner, 1996:257). These scholars point to globalization as a crucial factor leading to a convergence of economic policy in the industrialized world. While a wave of economic liberalization has swept OECD economies, governments in developing countries still use a variety of traditional economic tools to protect the relative autonomy of their domestic policies. Vital in this process is exchange rate policy for it is the exchange rate that serves as a buffer between international and domestic markets. Even after the collapse of the Bretton Woods system of pegged exchange rates, most developing countries continue to fix the value of their currency to that of their major trading partner. The logic is clear: by fixing the domestic currency’s value to that of a trading partner, exchange rate volatility is minimized. As a result, bilateral flows of capital and goods are not disrupted by exchange rate uncertainty and

Fallout from the Global Financial Crisis

WHEN THE SECURITY THREAT of the cold war ended it was commonly thought that the world would be a safer place. Yet the forces unleashed with the collapse of communism brought forth new economic competitors and 'marketization' at the same time that information technology innovation was transforming entire industries, making global markets possible. The international financial system has been in the forefront of these changes. With capital now moving in large amounts at the speed of an electron, a new concern has appeared - the dangers of unfettered market forces.The near meltdown in financial markets in 1998, the widespread and chaotic nature of the crisis, and the high casualty toll among innocent bystanders - particularly in poor countries - and knowledgeable market participants alike has spurred new calls for curbs on capitalism. Yet the international community's response over the past year demonstrates that the system can and is being made safer, both by improving how markets operate and by devising strategies for small open economies to integrate more safely into the system. Indeed, in mid-1999 concern about the crisis is being replaced with concern that the speed of recovery will blunt the will to change.While technology (as well as deregulation and removal of capital controls by governments) has made it possible for capital to flow freely and quickly across national borders, the flows themselves respond to shifts in economic growth, production, and rates of return, which have risen in developing countries relative to those in the mature industrial countries (that is, those countries which are members of the Organisation for Economic Co-operation and Development - OECD). Both groups of countries stand to benefit, but the challenge is to balance the obvious benefits of financial liberalization and open markets with the risks of possible financial instability. International financial markets that are free, open, and large channel capital into its most productive international uses. Cross-border capital flows contribute to more rapid economic growth for borrowing countries than if they were to rely on domestic savings alone (as Canadians know from their own history). Investors can realize higher returns.Yet the recent crisis underlines the potentially catastrophic costs of financial instability. By some estimates, the Asian crisis countries (Indonesia, Malaysia, the Philippines, South Korea, and Thailand) received capital inflows in 1995-6 equal to about 6.6 per cent of gross domestic product (GDP), while the subsequent reversal of these flows in 1996-7 amounted to a swing of about 11 per cent of GDP. Such a dramatic reversal is bound to create a backlash against market forces as arbitrary and unfair. Indeed, some argue that if this is 'normal' operation of the system, why participate in it? It is significant, however, that nearly two decades after the Third World debt crisis began in Latin America, almost no government has chosen to withdraw from the international financial system. Indeed, Latin American governments have increased their economic openness by replacing inward-looking import substitution policies with outward-looking export policies and by removing barriers to foreign direct investment. In the wake of the east Asian financial crisis, which occurred in a benign international policy environment and among economies already very open, both South Korea and Japan have responded by increasing their openness to foreign direct investment and by opening their financial markets further.At the outset, it is important to remind ourselves that the very nature of finance means that financial crises have always been, and will always be, with us. Panics, manias, and other frenzied problems occur in even the strongest financial systems because of asymmetric information. Information is not perfectly available to borrowers and lenders alike. Frequently lenders do not know the full risks of their lending decisions; in the absence of full information, they react to each other and to rumours, moving in herds and causing financial markets to overshoot. …

China's Currency Control: Features, Mechanisms, and Effects

Five years have passed since China's foreign exchange regime entered the era of current account convertibility in 1994. During the turbulent Asian currency crisis, China's foreign exchange management has met tests and challenges. To fight capital flight and defend the stability of the renminbi, the Chinese monetary authorities tightened foreign exchange controls in 1998. In this context, this paper reviews the evolution of China's foreign exchange management regime and reveals the features of the current regime's functional mechanisms. By critically assessing the successes and failures of the system, the paper examines the nature of foreign exchange policy changes in 1998. The paper concludes that, in the near future, Beijing is likely to consolidate the framework of the current foreign exchange regime by ensuring current account convertibility and keeping its grip over cross-border capital flows.

Capital income taxation and long-run growth: New perspectives

We study the effects of capital income taxation on long-run growth in an endogenous growth framework with two distinguishing features: endogenous population and international capital mobility. Endogenizing population growth introduces a new channel for taxes to affect economic growth and enables us to discriminate the effects of taxes on total versus per capita income growth. Allowing for capital mobility in the open economy, we show how the effects of taxes on population growth and income growth across countries will vary in specific ways, depending on the international income tax regimes and the relative preference bias of people towards the ‘quantity’ and ‘quality’ of their children. The numerical results based on our calibrated model for the G-7 nations also indicate that, although the effects of liberalizing capital flows on long-run growth may not be very sizable, the growth effects of changes in capital income tax rates can be tremendously magnified by cross-border capital flows and cross-border spillovers of policy effects.

Home bias and high turnover

This paper documents the available evidence on international portfolio investment in five OECD countries. We draw three conclusions from the data. First, there is strong evidence of a home bias in national investment portfolios despite the potential gains from international diversification. Second, the composition of the portfolio of foreign securities seems to reflect factors other than diversification of risk. Third, the high volume of cross-border capital flows and the high turnover rate on foreign equity investments relative to turnover on domestic equity markets suggests that variable transactions costs are an unlikely explanation for home bias.