Private Capital Outflows Research Articles

Greasing the revolving door: foreign aid, governance, and private capital flows

<p class="MsoNormal" style="margin-top: 8pt; line-height: 14pt; text-align: justify;"><span lang="EN-US" style="font-family: 'Cambria',serif; mso-fareast-font-family: '等线 Light'; mso-fareast-theme-font: major-fareast; mso-bidi-font-family: 'Times New Roman'; color: black; mso-themecolor: text1;">There is a considerable amount of debate on the impact of capital liberalization on economic performance. Using Three-Stage Least Squares (3SLS) estimation technique introduced by Zellner and Theil (1962), we synthesize studies on the determinants of governance and capital flows. We find evidence of a revolving door relationship. Foreign aid has a negative impact on governance and, thereby reduces capital inflows since bad governance hinders capital inflows. The need to fill the gap created by private capital outflows encourages inflow of foreign aid, which in turn harms governance. Therefore, capital liberalization could grease a revolving door and undermine economic development in the aid receiving countries.</span></p>

The AFL-CIO, the U.S. Balance of Payments, and the End of the Post–World War II Liberal Order, 1965–1973

This article analyzes the AFL-CIO’s international economic policy activism in the late 1960s and early 1970s within the context of the collapse of Bretton Woods monetary system. It shows that AFL-CIO economists developed a far-reaching critique of multinational corporations that encompassed not only concerns about import competition and capital flight but also charges that multinational firms contributed to the United States’ balance of payments woes. Fighting charges that union wages drove inflation, labor leaders maintained that private capital outflows and intracompany transactions exacerbated U.S. payments deficits. They therefore advocated for capital controls and import restrictions as alternatives to fiscal and monetary restraint. Their efforts to preserve the expansionary policies underpinning postwar liberalism, however, ultimately failed. By calling attention to the AFL-CIO’s failed activism in international monetary politics, the article offers a new vantage point for understanding organized labor’s declining influence in the last third of the twentieth century.

Monetary policy in an oil-dependent economy in the presence of multiple shocks

Russian monetary policy has been challenged by large and continuous private capital outflows and a sharp drop in oil prices during 2014. Both contributed to significant depreciation pressures on the ruble and led the central bank to give up its exchange rate management strategy. Against this background, this work estimates a small open economy model for Russia, featuring an oil price sector and extended by a specification of the foreign exchange market to correctly account for systematic central bank interventions. We find that shocks to the oil price and private capital flows substantially affect domestic variables such as inflation and output. Simulations for the estimated actual strategy and alternative regimes suggest that the vulnerability of the Russian economy to external shocks can substantially be lowered by adopting some form of inflation targeting. Strategies to target the nominal exchange rate or the ruble price of oil prove to be inferior.

Incidence of Short Term Private Capital Outflow: Empirical Analysis in Nigeria

Incidence of Short Term Private Capital Outflow: Empirical Analysis in Nigeria

Balance of Payments in Q1 2018: Analysis and Forecast

Russia’s positive balance of trade increased in Q1 2018 reflecting an increase of exports value amid slower growth of imports deliveries. Private capital outflow was observed triggered by the growth of foreign assets of Russian enterprises amid negative geopolitical expectations.

Ввоз и вывоз капитала: эффекты для России

In recent years Russian Federation has become one of the leading exporters and importers of capital in the world. The article reviews Russia’s place in the cross-border capital movement, the dynamics and structure of incoming and outgoing foreign direct investment (FDI), and of other types of investment, such as portfolio investment, bank and other loans, international reserves. The main effects of Russia’s capital exchange with the world on domestic economy are estimated. It is stressed that FDI somewhat contributed to the economic growth, diversification of production and productivity. At the same time, the advantages of FDI for modernization of industry were substantially underutilized. The private capital outflow reflects the intention of Russian leading companies to become global international corporations and to participate in the global value chains. However, this slows capital accumulation inside the country, therefore, preventing technological modernization of production and, as a consequence, an increase of enterprises’ competitiveness. Significant portion of capital export is illegal or “grey”. The authors conclude that the optimal model of capital exports and imports can be achieved only by crucial improvement of investment climate in this country. Special attention is paid to institutional changes carried out in recent years to improve business and investment climate in Russia. At the same time, it is shown that even if there is no radical change in business environment, the government and the companies are able to make extra investment inside the country. The article outlines the main directions and barriers for further development of capital movement components.

Determinants of TARGET2 Imbalances

The paper analyzes developments in TARGET2 imbalances within the euro area since 2007, from two perspectives: national central banks’ balance sheets and countries’ balance of payments (BoP). We examine the relationship between TARGET2 balances and the Eurosystem liquidity provision, analyzing how the circulation of the latter has changed during the crisis. We then study BoP developments in Greece, Portugal, Italy and Spain, investigating which of the following explanations accounts for the growing TARGET2 imbalances: (i) current account deficit, (ii) decrease of net inflows of private capital from securities and interbank markets and (iii) run on deposits. The results of our analysis suggest that while the increase in TARGET2 liabilities is related to the current account deficit in Greece, there is no evidence of this in Italy, Spain and Portugal. In all countries the increase is mostly driven by private capital outflows in securities and interbank markets; deposit runs are apparent only in Greece. In Italy, the reduction of capital inflows consisted entirely in a decrease in the interbank market cross-border activity and in portfolio investments by non-residents.

Managing Capital Flows in an Economic Community: The Case of ASEAN Capital Account Liberalization

The paper uses the emerging ASEAN Economic Community as a motivation to explore the issue of capital flow management in an economic community. Although there is an increasingly shared view that capital flow management measures should be part of the routine policy toolkit of emerging market economies, the logic of an economic community appears incompatible with extensive controls on capital flows. Substantial, if not complete, capital account liberalization must therefore take place across ASEAN. Few ASEAN countries are expected to have dismantled all capital account restrictions by 2015, thus requiring little need to introduce an entirely new set of capital flow management measures. Over the longer term, the ultimate requirements of an economic community seem to dictate that any remaining measures be market-based and not residency-based. Regional cooperation would be useful in enhancing individual country efforts, including collectively agreeing on the definition of a crisis and affirming the right of a member country to introduce an emergency measure in the event of a crisis. Our assessment is that most of the inflow restrictions could be removed quickly without creating additional risks; controls on private capital outflows could also be relaxed, albeit more judiciously, if for no other reason than to promote regional financial integration.

THE GLOBAL CREDIT CRISIS AND CHINA'S EXCHANGE RATE

The case for stabilizing China's exchange rate against the dollar is strong. Before 2005 when the yuan/dollar rate was credibly fixed, it helped anchor China's domestic price level. But gradual RMB appreciation from July 2005 to July 2008 created a "one-way-bet" that disordered China's financial markets in two respects: (i) no private capital outflows to finance China's huge trade surplus leading to an undue build up of official exchange reserves and erosion of monetary control, and (ii) a breakdown of the forward exchange market in 2007–2008 so that exporters could no longer get trade credit — probably worsening the severe slump in Chinese exports. But after July 2008, the credit crunch induced an unexpected unwinding of the dollar carry trade leading to a sharp appreciation in the dollar's effective exchange rate. The People's Bank of China (PBC) then stopped RMB appreciation against the dollar. China's forward exchange market was restored and monetary control regained. Now the PBC can better support the fiscal stimulus by promoting a parallel expansion of bank credit. But, since March 2009, the fall in the dollar (with the RMB tied to it) again threatens to undermine the yuan/dollar rate and China's monetary stability.

China's Crawling Peg: Does it Signify a Broader Shift in International Economic Strategy?

The accelerated expansion of China’s trade and current account surpluses since 2004, and the associated expansion of China’s foreign exchange reserves in the context of very rapid investment-driven domestic economic growth and adverse movements in China’s terms of trade have led China’s authorities to make several policy adjustments: (a) Substitution of a crawling peg to the US dollar for the hard peg previously maintained. (b) Some liberalization of private capital outflows, including of outward direct investment and progressive capital account convertibility. (c) Ratcheting back of measures to attract capital inflows. (d) VAT rebate cuts targeted at less sophisticated industries such as textiles. This note first reviews China's role in the growth of global imbalances and considers the central issue of the valuation of the yuan. It then considers the interpretation of the shift to a crawling peg in light of the other policy moves which, taken together, point to a broader policy shift.

The Case for Stabilizing China's Exchange Rate: Setting the Stage for Fiscal Expansion

AbstractChina's financial conundrum arises from two sources. First, its large saving (trade) surplus results in a currency mismatch because it is an immature creditor that cannot lend in its own currency. Instead, foreign currency claims (largely US dollars) build up within domestic financial institutions. Second, economists, both American and Chinese, mistakenly attribute the surpluses to an undervalued RMB. To placate the USA, the result was a gradual and predictable appreciation of the RMB against the dollar of 6 percent or more per year from July 2005 to July 2008. Together with the fall in US interest rates since mid‐2007, this oneway bet in the foreign exchanges markets not only attracted hot money inflows but inhibited private capital outflows from financing China's huge trade surplus. Therefore, the People's Bank of China had to intervene heavily to prevent the RMB from ratcheting upwards, and so became the country's sole international financial intermediary as official exchange reserves exploded. Because of the currency mismatch, floating the RMB is neither feasible nor desirable, and a higher RMB would not reduce China's trade surplus. Instead, monetary control and normal private‐sector finance for the trade surplus require a return to a credibly fixed nominal RMB/USD rate similar to that which existed between 1995 and 2004. However, for any newly reset RMB/USD rate to be credible as a monetary anchor, foreign “China bashing” to get the RMB up must end. Then the stage would be set for fiscal expansion to both stimulate the economy and reduce its trade surplus.

Resolving the Capital Scarcity in Nigeria

Nigerian businesses, federal and state governments alike have historically tended to look abroad to fund large projects. Facts on the outstanding values of bonds, loans and equity confirm that Nigerian capital markets are thin, compared with the sub-Saharan African average; some segments have even become thinner in the last two-and-a-half decades. The current global liquidity glut however offers Nigeria an easy opportunity to transit from a net origin of capital to a net destination of capital. We identify fiscal, monetary, and balance of payment leakages from the Nigerian financial system, and suggest that these leakages can be plugged to make capital more available to government, businesses and consumers in Nigeria. Specifically, we uncover and discuss two main problems that could explain the lack of depth in the Nigerian financial system: a.) Inadvertent but substantial diversion of government owned financial resources away from the domestic financial market by the government and the central bank as they tried to achieve some other policy objectives. With broad money (M2) amounting to a mere 17.6 percent of GDP in 2005, while government kept idle deposits of 21 percent of GDP at the central bank in the name of liquidity management, and 25 percent of GDP in external reserves abroad in the name of fiscal stabilization, we do not need to travel far to see what problems need to be fixed, and by who, to substantially ease the capital scarcity in Nigeria. Nigerian financial system can easily be much deeper, than it has been at any point in the past, if the government manages the re-injection of these dearly needed loanable funds carefully. b.) Negative real interest rates that drive private financial resources away from Nigeria towards positive real returns abroad. Net private capital outflow of 14 percent of GDP in 2005 alone, compared to total domestic bond market of 7 per cent of GDP in the same year, or 12.5 percent of GDP in bank loans, shows that Nigerian financial system could be deeper if it could retain capital originating from it by offering attractive positive real returns on domestic bank deposits and bonds, and perhaps attract some of the surplus liquidity in other emerging markets as well.

Private Capital Outflow from Pakistan

An important and often ignored aspect of Pakistan's economy during the Seventies and the Eighties has been the high degree of mobility of domestic private capital despite the prevalence of explicit capital controls. In a foreign exchange constrained situation the capital outflow arising frOm increasing private claims abroad can have macroeconomic consequences leading to welfare loss through the reduction of domestic real investment, foreign exchange availability and a shrinking tax base, which result in the loss of potential growth. It is important to have some estimate of 'capital flight' in order to uncover the 'concealed' transactions in the balance of payments and to reveal the actual behaviour of institutional agents, since a part of the balance of payments difficulties are due to the deinand for foreign assets by the private sector channelled through unrecorded transactions. Because of their hidden nature these transactions have remained unrecorded in the official economic accounts and are consequently neglected. Thus, despite the importance of this phenomenon, often identified as 'capital flight', there have been few attempts to investigate the issue in Pakistan [with the exception of Khan and Haque (1987)]. The main reason for this being the difficulty in identifying 'capital flight' within the recorded balance of payments.

Growth via External Public Debt and Capital Controls

This paper analyzes strategies for economic growth in a small, open, overlapping-generations economy that has access to perfect international capital markets and is characterized in autarky by multiple, locally stable, stationary equilibria. The study designs a growth scheme consisting of external public debt and controls on private capital outflows. This policy permits the economy to move from a low to a high output stationary equilibrium. The policy may be Pareto welfare improving if it is gradualistic and if the economy's rate of convergence to the better equilibrium is faster than the rate of debt accumulation. Copyright 1992 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Private foreign asset accumulation, not just capital flight: Evidence from the Philippines

External debt problems have been accompanied in many developing countries with large private capital outflows. The latter phenomenon is usually identified in the literature as ‘capital flight’. This article argues that private foreign asset accumulation is a more appropriate term and compares a great variety of definitions and measurement methods and applies these to Philippine data for 1971–88. Outcomes show striking differences in assessment of the magnitude of the phenomenon. In the preferred definition of this study applied to the Philippines, unrecorded workers remittances from abroad, a factor omitted in other studies, represent a major source of foreign exchange earnings which indirectly support private foreign asset accumulation. Other definitions appear to severely underestimate private capital outflows. Econometric evidence on the causes of private foreign asset acquisition shows a strong sensitivity to the applied definition. Regression analysis for six alternative definitions shows that the ex...

An econometric investigation of capital flight

This paper seeks to give a comprehensive empirical survey of private capital flight from developing countries. First, three alternative calcualtions of net private capital outflows are presented for 22 developing countries during 1978–85. It turns out that several of these countries had experienced major capital flight. Second, using an economtric model which combines time series and cross-section data, a portfolio model is estimated in order to find some of the reasons for capital flight. Third, on quarterly time series capital flight from Mexico is determined in a time jseries model. This analysis gives further insight into the causes of capital flight. The overall result from both studies is that changes in the expected relative rate of return on assets between the foreign and domestic market are a major cause of capital flight.

FOREIGN PRIVATE INVESTMENT AND THE GOVERNMENT'S EFFORTS TO REDUCE THE PAYMENTS DEFICIT

AFTER YEARS of urging U.S. business to contribute through investment to the recovery of Europe and to the economic development of emerging nations, the Government is now requesting curtailment of overseas investment and holding out the hope of early removal of such constraints. At the same time it does not want the curtailment to affect the economies of Canada, Japan, or the United Kingdom; even more, it wants an increase in the outflow of funds to the developing countries. The present attitudes and programs are set against a background of increased antipathy toward overseas operations reflected in the Revenue Act of 1962 and an announced policy of removing some developing countries from the less developed categories. The background includes also assertions by top officials that the recent constraints were necessitated by the alarming outflow of private capital into foreign securities in 1963 and the abnormal level of overall private capital outflow in late 1964, topping off fifteen years of deficits amounting to $35 billion.' This background suggests that a potential investor cannot know what the Government's posture on overseas operations in advanced countries will be, whether a given country may be classified as one not to be adversely affected by restraints or dropped out of the LDC class, or whether some new abnormality might lead to still further Government constraints. I submit that this posture is one which weakens rather than strengthens the U.S. economy. Further, it is a result of not identifying the problem correctly, thus leading to solutions which waste resources. A professor of mine once cautioned that otherwise sensible men frequently perpetrate the greatest of nonsense when they move into the field of international finance. We have not been without a good deal of nonsense in the past several years in this field. To be objective, I must either admit that you may hear more such nonsense during the next few minutes, or, maybe I can claim not to be an otherwise sensible man. But I would like to try to focus attention on what I consider to be the errors in U.S. policy, including the understanding of the nature of the fundamental problem itself, and then how we should go about reversing gears. There are three main reasons why we should reverse our stand: first, our tactics of constraint are inequitable and damaging to our long-run interests internationally and vis-a-vis business and economic policy; second, our strategy

The Balance of Payments: A Political and Administrative View

M Y working view of the balance of payments, a reasonably commonplace one, places it on three levels. At the bottom and most basic for policy is the net balance of goods and services. This yielded a surplus of $3.8 billions in 1960, $5.4 billions in 1961 and $4.8 billions in 1962, the result of a merchandise surplus of roughly the same size and a (net) investment income which had reached $3.3 billions in 1962. Against this were military expenses (amounting to $3.1 billions in 1962), net travel outlays (amounting to about a billion in 1962) and a variety of other payments and remittances including United States Government grants of nearly $2 billions. Preliminary figures for 1963 show an improvement in the net balance of about a billion dollars, the result of further increases in investment income, a modestly larger increase in exports than in imports and a slight decline in military spending.' At the next level are the long-term private capital outflows ($2.8 billions net in 1962) and government loans (amounting net to $1.5 billions in 1962). This outflow creates a corresponding claim by Americans on overseas resources and portends a possible later improvement in the payments balance as the result of interest, dividends and repatriated earnings. These items were evidently about the same in total in 1963 as 1962. But this was as the result of a sharp curtailment of private capital outflow in the second half of the year following a very large increase in the first half. Long-term outflows are continuing at a low level as this is written in early 1964. In 1962 all the foregoing transactions the so-called basic balance involved a deficit of $2.1 billions. There has been a deficit in this account in every year since 1947. At its highest in 1959 it amounted to $4.7 billions.2 In late 1963 and early 1964, the movement in this deficit was sharply down. The third level is ultimately derivative from the foregoing. Dollar claims accumulate as the result of the foregoing commercial transactions and capital movements. They can be held in the form of dollar deposits or converted into foreign currencies or gold. In the main they have been held in dollars and thus the large accumulation of current dollar claims in recent years -from around $7 billions in 1950 to some $25 billions at present. But some $7 billions has been converted to gold and removed from the monetary gold stock in the last six years. This has been the most visible and publicized aspect of the balance of payments problem and also the one that is most purely a consequence, rather than a cause, of changes at the other levels. Few public problems can ever have been so ingeniously contrived to maximize difficulty as that of the balance of payments. There has continued to be a question as to whether there is a problem. There has been a puzzling choice between real and spurious solutions. And each of the real solutions has been protected by a stout framework of vested ideological and economic interest reinforced, in some cases, by distinctly non-secular conviction. The sources of difficulty may be dealt with under the following heads: (1) The question as to whether there is a problem; 'In the last three years, apart from secondary discussions and memoranda, I have been concerned with the balance of payments problem on two major occasions. In 1961, during the first weeks of the new administration, I had general coordinating responsibility for the special message which was transmitted to the Congress in February, 1961. On my return from India in the summer of 1963, I was asked by President Kennedy to review the problem and report. This paper draws on this experience. But, as will be evident from the context, it does not reflect accepted policy and cannot be read as any indication thereof. Moreover it was, in some measure, my task in 1963 to consider ultimately rather than presently necessary action. 2 Data from Statistical Supplement to Survey of Current Business (1963), and Survey of Current Business (June, 1963), as used in The United States Balance of Payments in 1968, The Brookings Institution (Washington, D.C., 1963). Appendix Tables for 1963 from Economic Report of the President.