Introduction Descriptive analysis of international capital flows Explanations for Lucas paradox and allocation puzzle Discussion Patterns of International Capital Flows and Their Implications for Developing Countries 1 Mika Nieminen (University of Jyv¨ askyl¨ a) 2018 Nordic Conference on Development Economics June 11, 2018 Helsinki 1 Nieminen, M. 2017. Patterns of International Capital Flows and Their Implications for Developing Countries. UNU-WIDER Working Paper 2017/171. Mika Nieminen (JYU) - mika.p.nieminen@jyu.fi International Capital Flows 1 / 20
Introduction Descriptive analysis of international capital flows Description Explanations for Lucas paradox and allocation puzzle Motivation Discussion Description of the paper This paper is a review which attempts to present stylized facts on the recent patterns of international capital flows and put them in a historical perspective summarize potential explanations for them discuss their possible implications for developing countries Mika Nieminen (JYU) - mika.p.nieminen@jyu.fi International Capital Flows 2 / 20
Introduction Descriptive analysis of international capital flows Description Explanations for Lucas paradox and allocation puzzle Motivation Discussion Motivation for the paper Few phenomena have had such a huge impact on the global economic landscape as financial globalization (i.e. the rise of cross-border capital flows). 1 Lucas, R. E. Jr. 1990. Why doesn’t capital flow from rich to poor countries? American Economic Review, Paper and Proceedings 80 (2), 92–96. 2 Gourinchas, P-O, Jeanne, O. 2013. Capital flows to developing countries: the allocation puzzle. Review of Economic Studies 80 (4), 1484–1515. Mika Nieminen (JYU) - mika.p.nieminen@jyu.fi International Capital Flows 3 / 20
Introduction Descriptive analysis of international capital flows Description Explanations for Lucas paradox and allocation puzzle Motivation Discussion Motivation for the paper Few phenomena have had such a huge impact on the global economic landscape as financial globalization (i.e. the rise of cross-border capital flows). Standard economic theory: capital should flow from rich capital-abundant countries to poor capital-scarce countries. Reality: Little capital has flowed to poor countries (Lucas paradox) 1 . Negative correlation between capital inflow and productivity growth across developing countries (allocation puzzle) 2 . 1 Lucas, R. E. Jr. 1990. Why doesn’t capital flow from rich to poor countries? American Economic Review, Paper and Proceedings 80 (2), 92–96. 2 Gourinchas, P-O, Jeanne, O. 2013. Capital flows to developing countries: the allocation puzzle. Review of Economic Studies 80 (4), 1484–1515. Mika Nieminen (JYU) - mika.p.nieminen@jyu.fi International Capital Flows 3 / 20
Introduction Descriptive analysis of international capital flows Stylized facts on the patterns of international capital flows Explanations for Lucas paradox and allocation puzzle Historical perspective Discussion The size of net capital flows 3 Current account imbalances % of the world GDP 2 CASothers 1 OPEC Germany China 0 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Japan US CADothers -1 -2 Sources: WDI and WEO -3 Figure: Global current account imbalances, 1993-2015 Stylized fact 1 Global current account imbalances peaked in 2007. The U.S. has been the major capital importer. Mika Nieminen (JYU) - mika.p.nieminen@jyu.fi International Capital Flows 4 / 20
Introduction Descriptive analysis of international capital flows Stylized facts on the patterns of international capital flows Explanations for Lucas paradox and allocation puzzle Historical perspective Discussion The direction of net capital flows 1.5 1.0 CA balances % of the world GDP 0.5 Advanced 0.0 Emerging 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 and developing -0.5 -1.0 Source: WEO -1.5 Figure: Current account balances, 1997-2015 Stylized fact 2 During the first decade of the 21st century, capital flowed uphill from emerging market and developing economies to advanced economies. Since 2013 this flow has dried up. Mika Nieminen (JYU) - mika.p.nieminen@jyu.fi International Capital Flows 5 / 20
Introduction Descriptive analysis of international capital flows Stylized facts on the patterns of international capital flows Explanations for Lucas paradox and allocation puzzle Historical perspective Discussion The allocation of net capital inflows across developing countries 15 COG MOZ Net capital inflow (% of GDP) 10 TZA Figure: Average SEN NER BEN MDG CIV productivity growth LKA TGO JAM CRI MLI 5 PER and average net BOL MWI TUN HND GTM NPL CHL CYP JOR MAR FJI CMR AGO GHA capital inflow for 68 RWA ECU PHL UGA DOM THA ISR PAK MUS PRY BRA MEX ARG PNG PAN COL BGD URY MYS developing countries SLV ETH KEN IDN EGY IND TUR TTO IRN HTI 0 KOR between 1980-2000 ZAF SYR NGA HKG CHN VEN BWA -5 Sources: G&J (2013) and WEO GAB SGP TWN -4 -2 0 2 4 6 Productivity growth (%) Stylized fact 3 There has been a negative correlation, if any, between net capital inflow and productivity growth across developing countries. Mika Nieminen (JYU) - mika.p.nieminen@jyu.fi International Capital Flows 6 / 20
Introduction Descriptive analysis of international capital flows Stylized facts on the patterns of international capital flows Explanations for Lucas paradox and allocation puzzle Historical perspective Discussion Gross capital flows 15 10 Private Figure: Private outflow capital inflow, private Capital flow (% of GDP) 5 Change in capital outflow and reserves change in reserves for 0 Private emerging market and 1980 1985 1990 1995 2000 2005 2010 2015 inflow developing -5 Current economies, account 1980-2015 balance -10 Sources: BOPS and WEO -15 Stylized fact 4 During the first decade of the 21st century, the net capital flow between emerging market and developing economies and advanced economies was dominated by the reserve accumulation by central banks in emerging market and developing economies (especially China). Mika Nieminen (JYU) - mika.p.nieminen@jyu.fi International Capital Flows 7 / 20
Introduction Descriptive analysis of international capital flows Stylized facts on the patterns of international capital flows Explanations for Lucas paradox and allocation puzzle Historical perspective Discussion Gross foreign assets and liabilities and net foreign asset positions 300 Source: EWNII 250 (Asset position / GDP) x 100% 200 150 Figure: Average of gross foreign assets 100 and liabilities and net 50 foreign asset positions, 1970-2014 0 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 -50 Average of gross assets and liabilities of advanced economies Net foreign asset position of advanced economies Average of gross assets and liabilities of emerging market and developing economies Net foreign asset position of emerging market and developing economies Stylized fact 5 Gross foreign assets and liabilities are much larger than net foreign asset positions or net capital flows. This is also true for emerging market and developing economies although in these countries the increase in gross foreign assets and liabilities has not been as massive as in advanced economies. Mika Nieminen (JYU) - mika.p.nieminen@jyu.fi International Capital Flows 8 / 20
Introduction Descriptive analysis of international capital flows Stylized facts on the patterns of international capital flows Explanations for Lucas paradox and allocation puzzle Historical perspective Discussion Composition of external balance sheets Stylized fact 6 30 On aggregate level, the 20 (Net foreign assets / GDP) x 100% net foreign assets position of developing 10 countries is close to zero, but the 0 composition of their 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 external assets and -10 liabilities differ quite a bit. They have a -20 positive net Source: EWNII international investment -30 position in debt assets Net foreign risky asset position of advanced economies and foreign exchange Net foreign debt asset position and reserves of advanced economies reserves but a negative Net foreign risky asset position of emerging market and developing economies net position in risky Net foreign debt asset position and reserves of emerging market and developing economies assets. Mika Nieminen (JYU) - mika.p.nieminen@jyu.fi International Capital Flows 9 / 20
Introduction Descriptive analysis of international capital flows Stylized facts on the patterns of international capital flows Explanations for Lucas paradox and allocation puzzle Historical perspective Discussion Comparison of the current period (1973 onwards) with the first period of financial globalization (1870-1914) 1 They consider both quantity and price indicators on globalization in capital markets. See Obstfeld, M., Taylor, A. M. 2004. Global capital markets: integration, crisis, and growth. Cambridge University Press, New York (NY). Mika Nieminen (JYU) - mika.p.nieminen@jyu.fi International Capital Flows 10 / 20
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