For a number of years now, global capital flows have reversed as current accounts swung around and developing countries became net exporters of capital and developed countries net importers.
Most orthodox development theory would consider such net export of capital from poorer countries as a constraint on domestic investment. Exports of capital from poor developing countries – supposedly endowed with little capital – to the rich North – supposedly endowed with plenty of capital – have not constrained these countries’ ability to invest larger sums in fixed capital at home than any time in the last 30 years, a fact that poses a new challenge for orthodox development theory. It implies a need for a rethinking of the most crucial assumptions about how developing countries can best manage the functional relation between savings, investment, capital flows (including both foreign direct investment (FDI) and official development assistance) and the alternate policies, and paths that such policy diversity offers for catching up.

Global imbalances have become a major source of systemic risk to the global economy. They can have adverse repercussions in the short and long term on both surplus and deficit economies due to the potentially disruptive effect of a sudden adjustment. They can be amplified by short term speculation that prevents the real exchange rate to perform its adjusting role. The presentation explores past and recent patterns of destabilizing short term speculative flows that have led to financial fragility and real costs for a number of various economies. Domestic policies aimed at preventing speculation and overvaluation such as non-monetary anti-inflationary policies as well as temporary measures to constrain speculative flows should be coupled with globally coordinated policies to reduce global imbalances. Among the latter intermediate exchange rate regimes or regional cooperative schemes should be favoured. An international monetary system should provide a code of conduct, multilateral oversight and negotiations, and a multilateral body that could identify the size of the deviation enforce the necessary measures to correct the imbalances.

 

Delivered by: Division on Globalization and Development Strategies (GDS)

• Programme
• Presenters
• Participants

Presentations:

• The Capital Flow Paradox, Heiner Flassbeck, Director of UNCTAD's Division on Globalization and Development Strategies
• Global imbalances and the adjustment mechanism, Heiner Flassbeck, Director of UNCTAD's Division on Globalization and Development Strategies

Documents:

• Global imbalances and destabilizing speculation
• Globalization for development: Opportunities and challenges, Report of the Secretary-General of UNCTAD to UNCTAD XII, 2008