Unlike capital flows, which vary according to the economic environment, remittances tend to stay stable and are less volatile over time.

However, these flows tend to be more volatile than official flows and pro cyclical.

The financial crisis reduced private financiers risk appetite, making long term exposures unappealing. Net private capital flows, particularly to developing economies, have become more volatile.

Capital flows

Because of international financial liberalization, capital flows from capital rich to capital poor countries had increased, the cost of finance had gone up and the international system had grown both more volatile and more vulnerable, with less scope for developmental finance.

Capital account liberalization and renminbi internationalization invite potentially volatile cross border capital flows, which could, for example, trigger rapid currency appreciation. Given this, China can be expected to continue to manage capital account transactions to some extent, using macroprudential measures and, when appropriate, direct capital controls.

Why Capital Flows Uphill

Capital flows and remittances

A wide range of official measures could be employed to support domestic demand while protecting medium term fiscal sustainability. And, to address volatile capital flows, countries should increase exchange rate flexibility, maintain adequate international reserves, and implement carefully designed capital controls.

Second, caution has costs financial openness may itself catalyze improvements in fundamentals that enhance the benefits of globalization. Capital controls, whatever their benefits in terms of mitigating the risks associated with volatile capital flows, are costly in a variety of ways.

C. Investment and capital flows

Let me spell out what this means for three policy objectives building a stronger and safer financial sector, achieving more balanced and more stable growth, and managing large and volatile capital flows.

True, private capital flows have surged in the wake of global liberalization and these countries privatization schemes. But private capital flows have proven to be volatile and prone to sudden interruptions, as exemplified by the Asian and Russian financial crises of the late 1990 s, or more recently by investors pulling out from infrastructure sectors.

15. Underlines the importance, for the improved access of developing countries to international financial markets, of considering counter cyclical macroeconomic policies in the face of volatile capital flows and of strengthening macroeconomic stability

Encouraging private capital flows and remittances

Capital Flows and Growth in Africa, Geneva, UNCTAD.

E. The international environment Financial liberalization and capital flows

Table 2 Private capital flows to Africa, 1998 2003

Net portfolio flows displayed in the table have also been volatile and, since 2000, appear to have turned significantly negative.

Private capital flows have come to play the dominant role in development finance, eclipsing both official bilateral and multilateral flows.

But even though net international capital flows are going the wrong way, there are still substantial gross capital flows outward from the world economy s core to its periphery. And we can hope that these capital flows will carry with them the institutions and managerial expertise that have made the core so wealthy.

To address in the relevant international fora the urgency of measures at the global level to monitor short term capital flows, particularly in respect of the sources and movement of speculative capital, and to protect the autonomy of developing countries in managing capital flows and choosing their capital account regime.

Moreover, unlimited quantitative easing by the Bank of Japan, the Federal Reserve, and the European Central Bank also increases the risk of volatile capital flows and asset bubbles in Asian emerging economies. Chinese policymakers have raised serious concerns about the growing risks of inflation and property bubbles.

If China eases restrictions on cross border capital flows, an unexpected shock could trigger large scale capital flight, bringing down the entire financial system. Given this, it is vital that China maintains controls over short term cross border capital flows in the foreseeable future.

The final key risk facing the world concerns currency. Since the global economic crisis, the expansionary monetary policies that advanced economy central banks have pursued have caused large scale, volatile capital flows across emerging economy borders, generating significant instability for these countries and fueling accusations of currency wars.

(iv) Initiate measures that mitigate the impact of excessive volatility of short term capital flows.

Dasgupta, Dipak and Dilip Ratha (2000). What factors appear to drive capital flows to developing countries?

Below are several recommendations that should help to encourage private capital flows and remittances to African countries

These factors considerably limit those countries' ability to attract foreign direct investment and other international private capital flows.

Both private capital flows and workers' remittances constitute important sources of development finance for Africa as a whole.

(d) African authorities should view capital and remittance flows as an important part of their national economic statistics.

First, there are market failures, which occur when, for example, investors display herd behavior, information asymmetries exist, or the structure of incentives for investment managers encourages excessive risk taking. Second, there are policy failures, which occur when undisciplined macroeconomic policies and inconsistent or ineffective financial regulatory policies heighten the risks associated with volatile capital flows.

Freer capital flows will give poor countries precisely this access, as the greed of investors in rich country leads them to venture into poor regions where capital is scarce.

At the same time, since returns to capital are kept low by high wages, very little investment occurs. The excess of savings over investment flows abroad as capital exports.

But it is just as essential that developing countries maintain an appropriate degree of policy autonomy in managing capital flows and choosing whatever capital account regime they deem appropriate.

10. Reiterates that measures to mitigate the impact of excessive volatility of short term capital flows and to improve transparency of and information about financial flows are important and must be considered

13. Reiterates that measures to mitigate the impact of excessive volatility of short term capital flows and to improve transparency of and information about financial flows are important and must be considered

Indeed, recent work in economic theory shows that capital controls can actually be the optimal policy choice. For example, the new welfare economics of capital controls views unstable capital flows as negative externalities on recipient countries, which implies that regulations on cross border flows are the optimal tools to address market failures, improve market functioning, and enhance growth, not worsen it.

The IMF also fails to appreciate fully that capital flows should be regulated at both ends, or at least that advanced country regulations will not make matters worse. IMF research over the last year has outlined circumstances in which industrialized countries should also take part in regulating global capital flows.

The steady lowering of barriers to trade and capital flows across geographical borders was essential to promote industrialization around the world.

Expressing its desire to avoid disruptive capital flows and secure the Stock exchanges of OIC Members from any future financial crisis

6. Reiterates in this regard that measures to mitigate the impact of excessive volatility of short term capital flows and to improve transparency of and information about financial flows are important and must be considered

8. Reiterates in this regard that measures to mitigate the impact of excessive volatility of short term capital flows and to improve transparency of and information about financial flows are important and must be considered

The RMB will continue to appreciate in the near future, owing to strong economic fundamentals, but the inherent instability of short term capital flows will make its exchange rate more volatile. This change is bound to pose new challenges for decision makers in the United States and China, particularly as they engage in a fresh round of debate about China s exchange rate policy.

Concerned about the excessive volatility of speculative short term capital flows and the contagion effects in financial markets in times of crisis,