NCPA - National Center for Policy Analysis

Effects Of Capital Mobility On Emerging Markets

December 28, 2001

Globalization implies that investors and their money should be able to move freely among capital markets. While supporters of open markets argue that unfettered "capital mobility" is essential to global economic growth, critics blame unregulated capital inflows and outflows to and from emerging market countries for exacerbating or even precipitating the economic crises that roiled them in the 1990s.

Researcher Sebastian Edwards argues that capital investments are more or less regulated in every market, and there is not a strong body of detailed empirical analysis on exactly what it means to have an unrestricted financial market and how this openness (or lack thereof) affects a country's economy.

According to Edwards:

  • While countries with a more open capital account outperform countries that have restricted capital mobility, this positive relationship only manifests itself after a country reaches a certain degree of economic development.
  • That may be because countries can only take advantage of greater capital mobility once they develop a somewhat advanced domestic financial market.
  • At very low levels of local financial development, more open capital accounts may have a negative effect on economic growth.

More broadly, examining data from 20 advanced countries and 45 emerging markets, he found "...countries with a greater degree of integration with the rest of the world performed better than more isolated nations."

While critics of globalization would readily agree "account liberalization is not bad, per se," Edwards notes, their concern is that many emerging economies lack the institutions required to manage the dramatic inflows and outflows of investment routine in today's markets.

Edwards concludes that when it comes to the effects of capital mobility, "emerging markets are essentially different from advanced nations."

Source: Matthew Davis, "Capital Mobility in Emerging Market Countries," NBER Digest, May 2001: based on Sebastian Edwards, "Capital Mobility and Economic Performance: Are Emerging Economies Different?" NBER Working Paper No. 8076, January 2001, National Bureau of Economic Research.

For working paper abstract

http://papers.nber.org/papers/W8076

For NBER Digest article

http://www.nber.org/digest/may01/w8076.html

 

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