Friday, July 10, 2009

Capital flows and emerging economies recovery

Private Capital flows is a key variable, to support the economic growth of countries which can not count on domestic financial resources, due to the weakness of domestic capital markets to increase saving. However, these flows are both risk averse and with high sensitivity to any wrong doing on domestic economic policy matters, such that emerging economies actually have to cope with two crisis at the same time: Then one already under way ,and the other caused by the sudden stop of capital flows.
World banks reports indicates that while in the year 2007 the capital flows to emerging economies was USS 1,2 trillion, the year 2008 declined to USS 700 billion and this year it is expected to be USS 300 billion. Thus in less than two year the capital flow have decreased by a margin of four. Accordingly the rates of economic growth went down from 8,1 in the year 2007, to 5,9 in the year 2008, to 1,2 in the year 2009. Whether China and India are excluded, these countries´ growth is expected to be in the negative territory falling (-1,6%).-
These slower pace of economic growth mean that job losses increases, trade flows decrease ,and investment prospect are no better to improve expectations. Thus, the question is when these flows are going to be restored to its previous level?. The answer depend upon the chance of having a more robust global financial system, in the coming months. As long as the financial system remains fragile, the private capital flows will stay at low levels.
But there is a second question which is :Can Foreign Government aid be an effective replacement for those capital flows ?.In other words, is it possible to apply a kind of Global expansionary fiscal policy, to cope with the losses of growth in emerging economies due to lack of private financing?. Let analyze some scenarios to get an approximation to the answer :
a.- Extraordinary times call for extraordinary actions. However, a crucial issue is the effectiveness of these actions ,which depend in most of the cases upon the well design and proper focus of the policy prescription. However, in emerging economies, the problem is not only the proper focus ,but the structural economic conditions, ( weak institutions), which can make the whole issue of effectiveness a lot more complicated.-
b.- Whether experience is a proper guide to decide, there is strong evidence concerning the negative impact of Government aid to Emerging economies. Government recipient, has become the main cause for poverty, the main poverty producer and so the main poverty exporter. How come such a dramatic outcome could happen?. Foreign Government aid, has become in many countries a source of corruption when bureaucracy is in charge of managing those financial resources .At each level of bureaucracy , every one take a fee ,such that at the end of the process there is no financial resources left out ,to cope with the objective which justified it.-
c.- Emerging economies should take this global financial crisis as an opportunity , to undertake those reform which has been postpone in the past, specially those aimed at improving the quality and strength of its domestic financial sector and capital market, modernize its state management model ,to make it suitable to cope with the risk standard of private capital flows, and improve the domestic conditions for international trade. It is this combination of better incentives for both capital flows and trade, which really will help more the emerging economies to get back on the growth path soon.-