BIS has issued a new report on the impact of capital flows on emerging econs. The report is chaired by RBI’s Deputy Governor, Rakesh Mohan.
The flow of capital between nations, in principle, brings benefits to both capital-importing and capital-exporting countries. But very large flows can also create new exposures and bring new risks. The failure to analyse and understand such risks, excessive haste in liberalising the capital account and inadequate prudential buffers to cope with the greater volatility in more market-based forms of capital allocation have at one time or another compromised financial or monetary stability in many emerging market economies. On the other hand, rigidities in capital account management can also lead to difficulties in macroeconomic and monetary management.
This Report takes stock of the policy debate in this complex area over the past 20 years and examines the vulnerabilities associated with these capital movements. It finds that it is a combination of policies – sound macroeconomic policies, prudent debt management, exchange rate flexibility, the effective management of the capital account, the accumulation of appropriate levels of reserves as self-insurance and the development of resilient domestic financial markets – that provides the optimal response to the large and volatile capital flows to the EMEs. How these elements are best combined will depend on the country and on the period: there is no “one size fits all”.
Just notice the number of factors needed to be in place for capital flows to be effective:
- sound macroeconomic policies,
- prudent debt management,
- exchange rate flexibility,
- the effective management of the capital account,
- the accumulation of appropriate levels of reserves as self-insurance and
- the development of resilient domestic financial markets
Phew! That is nearly everything under the sun (Much like the Washington Consensus).
I also see this being added to most reports on reform- How these elements are best combined will depend on the country and on the period: there is no “one size fits all”. The Growth Commission said the same in its report – there is no “one size fits all policies” to generate sustained growth.
This “no one size fits all” is a sea change from the Washington Consensus. However, the list of “to do” much like WC- includes everything under the sun.
PS. Just a quick glance at the report, suggests it is quite good. It has a lot of case studies and full of graphs and charts. Despite near similar conclusions (see these papers from Rogoff , Obstfeld and numerous others), it is worth a read.