Forces of International Capital Flows


Ajit Kumar AJIT KUMARWISDOM IAS, New Delhi.

Powerful forces have driven the rapid growth of international capital flows. Prominent among these are
(i) the removal of statutory restrictions on capital account transactions, which is a concomitant of economic liberalization and deregulation in both industrial and developing countries;
(ii) macroeconomic stabilization and policy reform in the developing world, which have created a growing pool of commercial issuers of debt instruments;
(iii) the multilateralization of trade, which has encouraged international financial transactions designed to hedge exposure to currency and commercial risk; and
(iv) the growth of derivative financial instruments—such as swaps, options, and futures—which has permitted international investors to assume some risks while limiting their exposure to others.
Above all, technology has played a role. Revolutionary changes in information and communications technologies have transformed the financial services industry worldwide. Computer links enable investors to access information on asset prices at minimal cost on a real-time basis, while increased computer power enables them rapidly to calculate correlations among asset prices and between asset prices and other variables. Improvements in communications technologies enable investors to follow developments affecting foreign countries and companies much more efficiently. At the same time, new technologies make it increasingly difficult for governments to control either inward or outward international capital flows when they wish to do so. All this means that the liberalization of capital markets—and, with it, likely increases in the volume and the volatility of international capital flows—is an ongoing and, to some extent, irreversible process with far-reaching implications for the policies that governments will find it feasible and desirable to follow.
It is important to recognize that financial innovation and liberalization are domestic, as well as international, phenomena. Not only have restrictions on international financial transactions been relaxed, but regulations constraining the operation of domestic financial markets have been removed as countries have moved away from policies of financial repression. Domestic and international financial liberalization have generally gone hand in hand. Both respond to many of the same incentives and pressures.


Saturday, 05th Sep 2015, 11:16:18 AM

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