Economic Paper

2310-1385 (online)
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This series examines current economic issues from a Commonwealth perspective. The titles in the series are technical papers of topical interest to specialists concerned with trade, micro and macroeconomics, development economics and related subjects.
Promoting Private Capital Flows and Handling Volatility

Promoting Private Capital Flows and Handling Volatility

Role of National and International Policies You do not have access to this content

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Commonwealth Working Group
01 Jan 1997
9781848596306 (PDF)

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Report of a Commonwealth Working Group that considers the role of national and international policies in encouraging private capital flows for investment. The Working Group concluded that, in general, private capital flows can bring notable benefits for economic development by increasing growth and investment.
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  • Foreword

    Since the mid-1980s there has been a marked increase in international private capital flows with the growth of international trade and the increasing economic integration of business activity. Developing countries as a whole have witnessed significant increases in both portfolio flows and foreign investment. The bulk of these private flows, however, has been concentrated in a handful of developing economies, including several Commonwealth members, while the rest have yet to receive significant private capital inflows.

  • Executive Summary

    In response to a request from Commonwealth Finance Ministers at their last meeting in Bermuda in September 1996, a Working Group of Senior Commonwealth Finance Ministry Officials met in London earlier this year to consider the role of national and international policies in encouraging private capital flows for investment. The Group's views reflect a wide variety of experience: from industrial countries, from emerging markets, from some of the world's most dynamic and competitive economies, and from some poor countries that have yet to benefit from developments in the global economy. But despite these differences, the Group found that they have a good deal of shared experience, and that they have had to face a number of common economic challenges.

  • Introduction

    At their meeting in Bermuda in September 1996, Commonwealth Finance Ministers discussed international private capital flows and their implications for economic policy. They found much common experience, and asked a group of Finance Ministry officials to consider the issues further, to compare experiences, and to report by their next meeting in Mauritius in September 1997.

  • Growing Role of Private Capital Flows to Developing Countries in the 1990s Opportunities and Constraints

    International capital flows have increased markedly since the early 1970s and have, arguably, become as important as trade flows in promoting global economic integration. For the advanced economies, annual average gross foreign direct investment flows increased more than six fold between 1973-78 and 1989-94, while portfolio investment outflows increased 26 fold over the same period.

  • Enhancing and Sustaining Private Capital Flows

    In this chapter, we discuss the role of national policies in attracting and sustaining private capital flows, and in ensuring that those flows are put to best use within the host economy. While these policies may vary according to individual country circumstances, they will include sound macroeconomic fundamentals and the implementation of good microeconomic policies both on the human and on the institutional side. In this respect, foreign investors will look for many of the same factors that influence domestic private investors.

  • Handling Volatility of Private Capital Flows

    The experiences of countries who have received large capital inflows during the 1990s indicate two potential problems: sudden large surges of capital inflows and equally sudden slowdown or cessation of inflows, or outflows. The magnitude of these flows can be as large as 4 to 5 percent of GDP on an annual basis. Reversals of flows can also be very substantial if investors lose confidence in domestic macroeconomic policies, as was the case in Mexico, Turkey, Venezuela, Argentina, Brazil and Thailand.

  • The Role of International Policies, Agencies and Agreements

    This section explores the role of international organisations in facilitating capital flows to developing countries, in particular to those countries that are at risk of marginalisation and have not yet succeeded in attracting significant private investment. The IMF's role in assisting countries to dismantle capital controls and enhancing the confidence of international investors is examined along with the general issue of the IMF modifying its Articles of Agreement to accommodate capital account convertibility.

  • Commonwealth's Role in Enhancing Private Capital Flows

    In this section we examine the role of Commonwealth in enhancing and sustaining private capital flows and consider ways in which its activities in this area can be further strengthened. As a group of countries at different stages of financial integration but with many common features in legal and administrative systems, Commonwealth countries have much to learn from each other. Acting through the Secretariat, Commonwealth countries can provide technical assistance and policy advice to help member countries attract private capital flows.

  • Annex
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