The participation of foreign investors in these markets means that the risks of sudden reversals of foreign capital inflows is not eliminated.

In particular, capital expenditure revived in many countries and foreign direct investment inflows into the region also increased sharply in 2004.

For starters, countries should embrace policies that favor foreign direct investment (FDI) over inflows that can be withdrawn more quickly, such as foreign bank loans, debt, or equity investments. My research with Hui Tong of the International Monetary Fund shows that countries whose capital inflows that are mainly in the form of FDI tend to be more resilient to foreign financial shocks.

By mid 2003, some 776 of the country s financial institutions were closed. And the authorities strong commitment to reform restored investor confidence, reviving inflows of private capital and reactivating foreign trade.

Some countries responded by doing nothing, but many, including industrialized countries like Japan and Switzerland, intervened heavily in currency markets. Some resorted to capital account regulations on inflows, such as taxes on the foreign purchases of bonds, equities, and derivatives, reserve requirements on short term inflows, and so forth.

And what was true of China was also true of other emerging market countries receiving capital inflows. These countries foreign reserves, mainly held in US securities, topped 8 trillion at their peak last year.

Thus, the pattern in emerging market economies that liberalized capital inflows has been lower investment in the modern sectors of the economy, and eventually slower economic growth (once the consumption boom associated with the capital inflows plays out). By contrast, countries like China and India, which avoided a surge of capital inflows, managed to maintain highly competitive domestic currencies, and thereby kept profitability and investment high.

(iii) Booklets, fact sheets, wallcharts, information kits foreign direct investment inflows in the ESCWA region

(c) As the balance of payments deteriorated, especially after interruptions of capital inflows and sometimes massive flights of capital, the national currency was sharply devalued.

As long as Britain was a haven of political stability and tax policies favorable to foreign investors, it had no problem attracting capital inflows. But the impending shifts in Britain s politics and its EU relations are bound to draw attention to the economy s extreme dependence on foreign finance.

As long as China was running a trade surplus and receiving net inflows of foreign direct investment, the RMB remained under upward pressure. Short term capital flows had little impact on the direction of the RMB s exchange rate.

The fourth option is to impose capital controls on inflows (or liberalize controls on outflows). Leaving aside the issue of whether or not such controls are leaky, evidence suggests that controls on inflows of short term hot money do not affect the overall amount of capital inflows. Thus, such controls are ineffective in reducing short term cyclical pressure on the currency to appreciate.

High world oil prices and capital inflows are strengthening the balance of payments and contributing to exchange rate appreciation.

(a) Promote an economic and regulatory climate that is conducive to inward remittances and to capital inflows, in general.

Monetary policy was undermined by the banking crisis, and any reduction of interest rates to boost economic activities would encourage further flight of capital and stop capital inflows.

In a world of ultra low returns, Greece would be seen as a splendid opportunity, sustaining a steady stream of inward foreign direct investment. But why would this be different from the pre 2008 capital inflows that fueled debt financed growth?

Government policies can target private saving directly, by creating incentives for saving through appropriate tax and pension policies. Even more importantly, policies can discourage foreign borrowing led consumption booms by taxing capital inflows (Chilean style) or increasing financial intermediaries liquidity requirements.

The ability to refinance government debt and keep costs down is essential to strengthening public finances and boosting GDP growth. Furthermore, attracting more direct investment is crucial, given that capital inflows, while recovering, remain 30 below their pre crisis level with outflows exceeding inflows, Italy has become a net capital exporter.

Policymakers in many emerging market countries worry that surging capital inflows will drive up the value of the local currency, destabilize financial markets, and fuel economic overheating. Their reactions range from buying up the foreign money to prevent currency appreciation to adopting capital controls, and, in extreme cases, to keeping the money out altogether.

In addition, net foreign capital inflows are likely to dwindle for several quarters at least, affecting domestic monetary conditions while aggregate demand is weak. As such, the PBoC will need to maintain counter cyclical policies in order to avoid a deflationary spiral.

Although these booms were initially financed by domestic capital, they soon became dependent on foreign capital, which flowed into their economies as advanced country central banks pumped huge amounts of liquidity into financial markets. Now, just as the US Federal Reserve contemplates an exit from its unconventional monetary policies, emerging economies current account positions are weakening, making their reliance on capital inflows increasingly apparent and increasingly dangerous.

Cheap external finance, plentiful capital inflows, and commodity booms helped hide many such shortcomings and fueled 15 years of emerging market growth.

Remittances from workers are a major, stable source of capital inflows for many developing countries, but they are nevertheless subject to shocks.

Portfolio flows and foreign direct investment (FDI) posted the strongest growth, accounting for more than two thirds of total private inflows.

For developing countries as a whole, workers' remittances are the second largest source of private financial inflows after foreign direct investment.

The 1990s witnessed a rapid expansion of private capital inflows into developing countries, registering a sevenfold increase over the average for the 1980s.

The precise circumstances in which the vulnerability to the reversal of capital inflows arose and the subsequent impact on growth varied from region to region.

Should a country with weaknesses in its financial system simply avoid letting capital in? While this has become more difficult, countries can still choose at least to some degree how open they are to capital inflows.

Many developing countries have made progress since the 1990 s in shifting from dollar denominated debt toward foreign direct investment and other types of capital inflows, or in paying down their liabilities altogether. But some commodity exporters still seek ways to borrow that won t expose them to excessive risk.

Ironically, today s pain stems from one of the great successes that emerging economies have achieved the reduction of foreign currency funding in favor of local currency debt. As emerging market central banks leaned against heavy capital inflows in order to mitigate exchange rate appreciation, their currencies became less volatile.

But, over the past several years, a number of sub Saharan countries have attracted unprecedented inflows of foreign capital. Recent global financial turmoil has only added to Africa s allure, because its frontier markets are less vulnerable to international volatility than are most of the world s more familiar emerging economies.

Industrialized economies are seeking to recover from the crisis, and want credit and capital to stay home to boost growth, while developing countries have little interest in gaining short term capital inflows. This could form the basis for industrialized countries to adjust their tax codes and deploy other types of regulation to keep capital at home, while emerging markets implement measures aimed at changing the composition and reducing the level of potentially destabilizing inflows.

Government investment in infrastructure, both alone and in partnership with private firms, will also directly benefit growth and attract larger inflows of foreign investment.

Financial liberalization would attract foreign capital seeking high returns in capital scarce countries, allowing them to invest more than they saved.

An expected decline in foreign aid due to the phasing out of humanitarian and post conflict recovery assistance, as well as perceived high levels of corruption, could result in a substantial reduction in foreign inflows.

Foreign capital inflows would allow them to draw on the savings of rich countries, increase their investment rates, and stimulate growth. In addition, financial globalization would allow poor nations to smooth out the boom and bust cycles associated with temporary terms of trade shocks and other bouts of bad luck.

Thus, it became essential to launch a new wave of far reaching reforms, including liberalization of interest rates, securities markets, and foreign exchange controls, in order to fund the more productive private sector and reduce excess capacity in SOEs. In particular, the reforms were needed to deflate an emerging property bubble resulting from huge savings and foreign capital inflows that had no other profitable investment outlet.

Coupled with favorable international conditions, Egypt s annual GDP growth rate rose to 7.2 in 2008, from 4.1 in 2004, and remained at 5 in 2009 2010, despite the global recession. The new measures also helped to attract large capital inflows and foreign direct investment, underpinning a dramatic rise in foreign currency reserves, from 14.8 billion in 2004 to more than 36 billion by the end of 2010.

All of these actions should help increase the absorptive capacity for foreign capital.

Foreign direct investment inflows to Africa increased from 12 billion in 2002 to 15 billion in 2003 and are likely to reach 20 billion in 2004.

Africa, in particular, is likely to show a modest increase in foreign direct investment inflows but here again those investments remain largely concentrated subregionally and sectorally.

By limiting foreign inflows and keeping domestic interest rates low, China was able to maintain a relatively weaker currency, which served to sustain its export led growth model. This led to massive current account surpluses (more than 10 of GDP at one point), which sent capital flowing to the rest of the world.

According to the United Nations Conference on Trade and Development (UNCTAD), liberalization of foreign direct investment regimes may have been a factor that helped to reverse the downward trend in new foreign direct investment inflows to developing countries.

Another global financial crisis could disrupt short term capital inflows. A dangerous neighborhood means inescapable risks, though Turkey has demonstrated a remarkable capacity during the last decade to surmount them.

Other emerging markets growth prospects are even worse not least because of low commodity prices. As a result, these countries can expect lower capital inflows, again making for weak local currencies.