• by lmaz Akyüz
• Monday, April 11, 2011
• Inter Press Service

An unusual feature of the global financial crisis is that for developing countries (DCs) the financial band seems to have picked up the pace of the music. While many advanced economies (AEs) continue to encounter debt deflation, financial stringency and risks of insolvency, the financial problem for most DCs is asset inflation, credit expansion and currency appreciations, writes lmaz Akyüz, Chief economist of the South Centre in Geneva.

Except for a brief interruption in 2008, DCs have continued to receive large capital inflows as major AEs have responded to the crisis caused by excessive liquidity and debt by creating still larger amounts of liquidity to bail out troubled banks and governments, lift asset prices and lower interest rates. Quantitative easing and close-to-zero interest rates are now generating a surge in speculative capital flows to DCs with higher interest rates and better growth prospects, creating bubbles in foreign exchange, asset, credit and commodity markets.

This is the fourth post-war boom in capital flows to DCs. All previous booms also started under conditions of rapid liquidity expansion and exceptionally low interest rates in the US, and all ended with busts.

When policies falter in managing capital flows, there is no limit to the damage that international finance can inflict on an economy. Multilateral arrangements lack effective mechanisms that restrict beggar-my-neighbour policies by reserve issuers or enforce control on outflows at the source. The task falls on recipient countries. But many DCs still adopt a hands-off approach to capital inflows while others have been making half-hearted attempts to control them through taxes that are too low to match large arbitrage profits promised by interest rate differentials and currency appreciations. In either case taking capital controls much more seriously is now the order of the day.

(*) Chief economist, South Centre, Geneva. This is based on "Capital Flows to Developing Countries in a Historical Perspective: Will the Current Boom End with a Bust?" South Centre Research Paper 37 (www.southcentre.org).

//NOT FOR PUBLICATION IN CANADA, CZECH REPUBLIC, IRELAND, POLAND, AND THE UNITED STATES//

© Inter Press Service (2011) — All Rights Reserved. Original source: Inter Press Service

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