Volatility in International Financial Markets. (Developing Further an Open Financial System)

Article excerpt

"Since September 11th, there has been a global commitment towards discovering a multilateral solution to the war on terrorism. There is still much work to be done in the area of better global economic governance", said Stephany Griffith-Jones, Professor of the Institute of Development Studies at Sussex University, on releasing the report, "Capital Flow to Developing countries since the Asian Crises: How to manage their volatility", which is one of the twelve projects undertaken by the World Institute on Development Economic Research (WIDER).

WIDER, established by the United Nations University in Tokyo and based in Helsinki, Finland, is one of the leading research institutes devoted to development economics and provides a forum for professional interaction amongst economists from the United Nations, policy makers, scholars and other international organizations worldwide. Its work is carried out by staff researchers and visiting scholars and through networks of collaborating scholars and institutions around the world. The Institute recently organized a conference in New York, where participants discussed the increased volatility of the international financial market and the various aspects of international financial reform. WIDER, in collaboration with the UN Economic Commission in Latin America and the Carribbean (ECLAC) and the International Development Strategy (IDS), has attempted to provide a constructive approach to reduce the impact of the steep reduction of capital flow into the developing world.

Ms. Griffith-Jones, in her paper entitled "Capital flows to Developing countries", focused on how capital flows to these countries have changed since the Asian crises. The capital market had undergone extreme liberalization in the 1990s, which led to greater flows of private capital to the developing world. This took the form of stocks and bonds, which further broadened the class of global investor beyond banks and multinational corporations, to include individual investors and managed funds, as well as institutional investors such as pension funds, insurance companies, university endowments and foundations. These investors brought in increased capital flows, which in turn introduced greater exposure to the volatility of stock and bond prices in each developing country, and advanced capital markets. Prof. Griffith-Jones discusses at length how investors, lenders and other financial actors make their decisions to supply capital to developing countries, and how decision-making influences or determines their ma in features, in particular their tendency to pro-cyclicality and short terminism.

Her paper highlights two problematic aspects of capital flows to developing countries: their current very low levels and their strong reversibility.

Regarding the sharp decline in this new pattern of private flows, the paper states: "According to IMF (International Monetary Fund) data (2002), net private capital flows to emerging market economies, which had peaked in 1995 to almost $240 billion in 1996, having grown consistently throughout the first half of the 1990s, more or less halved to less than $120 billion in 1997, fell by around 40 percent to less than $70 billion in 1998 and 1999, collapsed to less than $10 billion in 2000, and recovered only very faintly to $31 billion in 2001."

The current capital flow into developing countries is a major cause of recent large and developmentally expensive crises. Very low or negative private flows are inhibiting growth in much of the developing world, especially in Latin America. Ricardo French Davis indicates in his paper, "Financial crises and National Policy Issues", that these problems are to an important extent caused by patterns of boom-bust behaviour by actors in the capital and credit markets of New York and London. …