Professor Stephany Griffith-Jones - Economist
July 13,2003
Professor Stephany Griffith-Jones
Capital controls
have recently been in the news, as
Currently, however, for most developing countries, capital controls are not the main issue. Quite the contrary! Since the Asian crisis, net capital flows to emerging market economies have fallen very sharply; net debt flows turned strongly negative, leading the World Bank to conclude that “the developing world has become a net capital exporter to the developed world.” Net private flows to Latin America are estimated by the IADB to have declined from around 5% of the region’s GDP in 1996 to zero in 2002.
This sharp decline is partly due to structural changes. International banks have crossed the border by establishing subsidiaries or branches in developing countries, and substituted foreign lending by domestic intermediation. And some portfolio equity investors feel that there are not many “sufficiently large” companies left for equity investors to buy in developing countries.
If a drought of capital flows to emerging markets continues, the policy agenda needs to shift sharply, both nationally and internationally, encouraging sufficient stable private flows. Here, I will focus on international measures.
A novel problem that has arisen during and after crises is that trade credit has dried up. This inhibits the positive impact of large depreciations on expansions of exports, key to post-crisis recovery.
At present, government institutions such as export credit guarantee agencies (ECAs) and multilateral development banks limit their activities (providing guarantees and credits) to longer-term assets. An important policy question is whether they should also cover trade finance. The Inter-American Development Bank is exploring the creation of a guarantee mechanism to encourage trade finance by commercial banks. An institution like an ECA or the IADB could also grant trade credit in special circumstances. Such a program for guarantees or direct provision of trade credits could be phased out once full access to trade credit was restored.
In the case of long-term trade credit, ECAs already play a large, though declining, role in guaranteeing credits. Should not ECAs and development banks be counter-cyclical in the guarantees they grant? It is widely accepted that international financial markets tend to overestimate risk in difficult times and underestimate it in good times, which implies a strong case for introducing an explicit counter-cyclical element into risk evaluations made by export credit agencies. When banks lowered their exposure to a country, ECAs would increase their levels of guarantees. When matters were seen to improve, and banks increased willingness to lend, ECAs could decrease their exposure, for example by selling export credit guarantees in the secondary market. This would avoid greater counter-cyclicality of guarantees resulting in an increased average level of guarantees.
Another suggestion relates to a more developmental role for socially responsible investment (SRI). Traditionally, SRI had a more negative slant, restricting investment in undesirable activities, such as those that do not meet environmental or labour standards. A new definition of SRI should specify that one of its central aims would be a positive one, to support long-term private flows to developing countries that help fund pro-poor growth.
A change in the concept of SRI, from a purely negative “anti-bad things” to emphasis on pro-poor growth in developing countries, could have a positive impact on the level and stability of private flows to developing countries. In particular, pension funds could provide more stable flows as their liabilities are on average very long term.
An important challenge is to influence SRI investors to help promote development. Such investment will also be profitable. The return/risk ratio of a portfolio with part of its assets invested in developing countries will be higher than if it invests purely in developed countries.
The potential is
large, given the rapid growth and high level of SRI assets. In the
A switch by SRI investors
to pro-poor growth would be consistent with their aims. In a recent survey
of