D. Private flows

The initial inflow of capital from FDI is a benefit the subsequent outflow of profits is a cost.

35. With the opening up of the capital account, there has been a tendency for currencies to appreciate as a result of increased capital inflows.

In 2003, net private capital flows to developing countries had remained positive and continued to be the largest component of capital flows to such countries.

However, these have been partially offset by net outflows of other kinds of capital.

Noting that capital flows, in particular private capital flows, to developing countries have been increasing strongly but that not all countries have benefited from such flows and that short term capital movements can be unpredictable,

Net capital inflows of US 5.8 billion cushioned the trade deficit.

Recent inflow, albeit relatively small, of private capital into Africa demonstrates that, with appropriate institutions, structures, and policies, Africa could potentially be a beneficiary of much higher inflows.

(In billions of United States dollars)

The fourth option is to impose capital controls on inflows (or liberalize controls on outflows). Leaving aside the issue of whether or not such controls are leaky, evidence suggests that controls on inflows of short term hot money do not affect the overall amount of capital inflows. Thus, such controls are ineffective in reducing short term cyclical pressure on the currency to appreciate.

C. Investment and capital flows

The Capital Flow Conundrum

Capital flows

In addition to further marginalization, Africa faces the risks of capital flows drying up or reversing, thereby precipitating a crisis.

Foreign direct investment flows remained highly concentrated in the larger emerging market economies.

Freer capital flows will give poor countries precisely this access, as the greed of investors in rich country leads them to venture into poor regions where capital is scarce.

The ability to refinance government debt and keep costs down is essential to strengthening public finances and boosting GDP growth. Furthermore, attracting more direct investment is crucial, given that capital inflows, while recovering, remain 30 below their pre crisis level with outflows exceeding inflows, Italy has become a net capital exporter.

Moreover, private capital flows to developing countries had been directed to only a small number of such countries.

3. At the same time, there were good reasons to conduct partial sterilization of capital flows.

The pro cyclical boom bust cycles of private capital inflows and outflows underscore the need for developing market institutions and instruments that encourage more stable capital flows.

Northbound Trading Link (NTL), which has seen continuous net inflow of foreign capital, recorded a net capital inflow of RMB 8.7 billion in July, higher than the previous month.

OF remains the major source of resource flow into Africa, particularly since Africa s access to international capital markets is limited.

INCLUDING CAPITAL FLOWS INVESTMENT TRADE

Capital flows and remittances

(c) As the balance of payments deteriorated, especially after interruptions of capital inflows and sometimes massive flights of capital, the national currency was sharply devalued.

Complementary actions on the part of African and capital exporting countries could assist in attracting and increasing private flows.

Thus, the pattern in emerging market economies that liberalized capital inflows has been lower investment in the modern sectors of the economy, and eventually slower economic growth (once the consumption boom associated with the capital inflows plays out). By contrast, countries like China and India, which avoided a surge of capital inflows, managed to maintain highly competitive domestic currencies, and thereby kept profitability and investment high.

As brooks flow into streams, streams into rivers... and rivers into the sea... so our adepts flow back to us and swell our ranks.

Similarly, a potential downside to quantitative easing is that low interest rates send capital to higher growth, high interest rate countries. In theory, as capital floods in, these countries exchange rates will appreciate rapidly, making them look unattractive and automatically stemming the flow.

Table 2. Net private capital flows to low and middle income countries by country group

In fact, without appropriate development of infrastructure, even private capital may not flow in.

Fostering an enabling environment for development financial flows, including capital flows investment trade

But even though net international capital flows are going the wrong way, there are still substantial gross capital flows outward from the world economy s core to its periphery. And we can hope that these capital flows will carry with them the institutions and managerial expertise that have made the core so wealthy.

46. In the foreseeable future, nonetheless, private capital flows are unlikely to meet the residual financial requirements of African countries.

Code of Liberalisation of Capital

Payment for debt servicing represents a negative flow of resources.

Secondly, while some low income countries have been the recipients of the increased private sector capital flows, others have not benefited at all.

Table 3 External trade indicators for developing countries and territories,

However, so far three quarters of these flows have gone to only 12 countries, and such flows can easily be suspended or reversed.

The participation of foreign investors in these markets means that the risks of sudden reversals of foreign capital inflows is not eliminated.

In many cases, a combination of capital outflows, profit remittances and the accumulation of exchange reserves greatly reduced net inflows, and of these a growing proportion was absorbed by activities which added little to productive capacity.

But such flows did little to ease payment difficulties, and attempts to meet foreign exchange deficits of TNC related activities by encouraging new inflows of the same kind could also be self defeating (Kregel, 2004, UNCTAD 2005).

The annual capital inflow in the 1990s was around 5 per cent of GNP, which was roughly the level prevailing in 1975 1982.

High world oil prices and capital inflows are strengthening the balance of payments and contributing to exchange rate appreciation.

(a) Promote an economic and regulatory climate that is conducive to inward remittances and to capital inflows, in general.