Slowdown in the Capital Flows

A large amount of capital, mainly Equity Investment and Portfolio Equity, moves from “Mature Countries” (USA and Europe) to   “Emerging Countries” (Asia, including China; Eastern Europe, including Russia; Middle East; Latin America). The “poor” countries offer to investors low cost of production, high profit, and low taxes; and the companies of rich countries take advantage of the USA “easy money”, sometime claiming to be working to lift the poor countries out of misery. 

Such countries develop their industry and use a part of the money coming in to reinforce their currency reserves, and also to invest some into the rich markets. This flow of capital is an important element of international economy, and is followed in detail by the iif-Institute of International Finance. The flow of capital   to “Emerging” reached in 2003 a peak of 1,200 billion dollars. The next two years the economic and financial crisis reduced the flow   to 600 billion dollars, but in    2010 the figure grew up  again to about 1,200 billion dollars.  The system seemed well oiled, and stable in time.  Everybody   expected that the 2013 the capital flow   would be a new record, but   the figure for 2013 was estimated in October 2013 at about 1090 billion dollars, for both 2013 and 2014, 158 billions less the previous year. Moreover, the Emerging Countries are exporting more capital than they import.

The iif has a number of explanations for such an   abrupt change. The “poor” are not growing much, and the temporary difficulties of the USA Budget had some negative effect; or, possibly, the profit rate is today higher in USA than in China. American capital is now attracted by the profits obtained by   developing   the supply of crude oil and natural gas   with “fracking” technology; and the cheap energy encourages investment in the American Chemical Industry, and   in other Heavy Industries. At the same time, the long recession in Europe, and the difficulties   of European banks might have discouraged   capital exports.

There are also specific reasons.The expenses for the acquisition  by Rosneft for the Russian State of
TNK from the original  partners BP perhaps reduced  Russia's inflow.In Asia, China included, the inflow has gone down   from 631 to 480, and it will be the same in 2014. In the case of China there has been a slow-down of the economy. China’s   private capital outflow is estimated for the 2014 at 485 billion, higher than the inflow of 473 billions. Many Emerging countries, like China, are by now increasingly integrated in the world economy. So, the flow of capital   to hem does not represent any more money from a rich country to a poor one. 

On the other side, the American Government is not satisfied   of the inflow of industrial capital in the USA from abroad is not large enough, especially in the case of manufacturing.  The foreign investment in the USA has declined recently, in apparent contradiction with the easy money of the Government, which    was supposed, and still is, to reduce the number of the unemployed. This objective is not easy to reach   with heavy industry, which requires less and less workers and more and more capital for unity of production.  An inflow of light industry from abroad would absorb a part of the unemployed with a relative small amount of investments in new production capacity.   A lower rate of unemployed   is the main objective of the USA Government, and it makes sense to try to obtain the required effect by stimulating the inflow in the country of light industry.

P.S. The sort of double fiasco on the negotiations on the two hot potatoes of Iran nuclear and of the Syrian revolution, did not upset much the oil market, which is still   influenced by the efforts of the USA and of Canada to enlarge their market for crude oil and   natural gas, both being quite abundant in those two large countries where    “fracking” is quite generalised. However, reading the future is difficult, and the present situation may not continue for long. To day, the optimistic evaluation of the future has been challenged by a study of the International Authority for Energy, which does not deny the great development brought by the new technology, but considers it transient, a temporary bulge that will   deflate perhaps in less than ten years.

 The study forecasts that non-OPEC oil production will decline, and the market will come back to the large producers of OPEC members, and especially to those who have large resources not fully exploited to day. The Authority forecasts that the price of crude will increase, fostering an increase of exploration activity, which, however, is not seen as greatly successful, as the low cost producers are really only those in the Middle East. The American Energy Ministry seems to think along the same lines. It foresees that the producing countries of the Middle East will be an important exporter of crude oil, considering also that “light tight oil is not low cost oil”. The International Agency foresees that the renewable energies, which were 13% of the total in 2011, will go up to 18% by 2035. The renewables for road transport will double from the present 3% up to 8% in 2035.

These numbers seem to support the position taken up now by the Middle East producers, who maintain that their oil will last much longer than we think, and that the international price for crude oil will be for a long time fixed by the long term producers of low cost crude oil. Up to now, the political uncertainty of the Middle East   has not influenced the crude oil production, Libya being the only place in which oil is not produced regularly.  Notwistanding the delusion   on the behaviour of their long time allies and friends, the long-term producers of the Middle East intend to remain the main long-term suppliers of crude oil, and the dominant factor on that market.    

Capital Inflow  in Emerging Countries  (in billion dollars)

Capital Outflow from Emerging Countries (in billion dollars)