International finance and Caribbean development
Introduction Globalization, defined as the international integration of markets in goods and services, is at the centre of the development process in the contemporary world and is an inescapable part of the external environment in which Caribbean 1 countries must exist. Global financial integration, the integration of the world's financial markets into a single global marketplace, is a subset of globalization. The developing countries of the Caribbean can ill afford to disregard the existence of this process. Indeed, advances in communications and recent developments in finance make the path toward financial integration unavoidable (World Bank, 1997). The real issue is not whether the Region should be part of this new age of global capital, but rather, how to proceed along the road to financial integration such that the considerable benefits could be realized and the significant pitfalls mitigated.Creating the right macroeconomic environment is a prerequisite for effective financial integration. But the small countries of the Caribbean also face peculiar constraints in attracting global capital. Small size and the associated structural inefficiencies, a limited natural resource base and high transportation costs to export markets, all reduce the relative attractiveness of many of the economies to international capital. In effect, these features make the Caribbean market for global funds inefficient. Providers of international capital find it difficult to adequately measure and allocate the risks. The imminent cessation of preferential trading arrangements, under which critical segments of the regional productive sector have operated, exacerbates the risk perceptions. A relatively broad consensus has emerged concerning the necessary conditions for successful financial integration. These include an appropriate macroeconomic framework, a liberalized trading environment so as to preclude large domestic price distortions, a sound and well regulated banking system and appropriate capital market infrastructure. It is the thesis of this paper, that in the small and very vulnerable countries of the Caribbean, these conditions are not sufficient to ensure financial integration. It is argued that in spite of the low and declining volume of official flows to the Region, such flows are critical in assisting these countries address risk perceptions and help to induce increased private flows. This paper examines the recent developments of international capital flows into the Caribbean. It first reviews the experience of the Region in the 1990s with respect to both official and private capital flows. The major determinants of the flows are then examined and the policy implications are identified. The impact of external flows on domestic savings is analyzed. Finally, the paper examines the accessibility of international capital markets to regional economies and the role the Caribbean Development Bank could play in facilitating such access.
WHO NEEDS CAPITAL-ACCOUNT CONVERTIBILITY?
Imagine landing on a planet that runs on widgets. You are told that international trade in widgets is highly unpredictable and volatile on this planet, for reasons that are poorly understood. A small number of nations have access to imported widgets, while many others are completely shut out even when they impose no apparent obstacles to trade. With some regularity, those countries that have access to widgets get too much of a good thing, and their markets are flooded with imported widgets. This allows them to go on a widget binge, which makes everyone pretty happy for a while. However, such binges are often interrupted by a sudden cutoff in supply, unrelated to any change in circumstances. The turnaround causes the affected economies to experience painful economic adjustments. For reasons equally poorly understood, when one country is hit by a supply cutback in this fashion, many other countries experience similar shocks in quick succession. Some years thereafter, a widget boom starts anew. Your hosts beg you for guidance: how should they deal with their widget problem? Ponder this question for a while and then ponder under what circumstances your central recommendation would be that all extant controls on international trade in widgets be eliminated. Substitute “international capital flows” for “widgets” above and the description fits today’s world economy quite well. We have just gone through a lending boom-and-bust cycle in Asia which is astounding in its magnitude. In 1996, five Asian economies (South Korea, Indonesia, Malaysia, Thailand, and the Philippines) received net private capital inflows amounting
Capital Flows, Real Exchange Rates, and Capital Controls: Some Latin American Experiences
This paper deals with some of the most important aspects of Latin America's experience with capital flows during the last twenty-five years. The paper begins with a historical analysis. I then deal with the sequencing of reform and discuss issues related to the relationship between capital flows, real exchange rates, and international competitiveness. I next concentrate on the role of capital controls as a device for isolating emerging economies from the volatility of international capital markets. I begin by reviewing the policy issues and the current debate on the subject. I then present an empirical analysis of Chile's recent experiences with capital controls and make some comparisons to the recent experiences of Columbia. The analysis of the Chilean experience is particularly important since its practice of imposing reserves requirements on capital inflows has been praised by a number of analysts, including senior staff of the multilateral institutions, as an effective and efficient way of reducing the vulnerability associated with capital flows volatility. The results obtained suggest that capital controls in Chile have had mixed results: while they have allowed the Central Bank to have a greater degree of control over short term interest rates, they have failed in avoiding real exchange rate appreciation. The paper ends with some reflections, based on recent Latin American historical episodes, on the role of banks in intermediating capital inflows and on financial crises.