Capital flows to emerging economies

There is  some uncertainty about what is, or will be, the sign that the world financial crisis is finally over. Given the stubborn  resistance of unemployment almost everywhere, that kind of number is definitely out. And even the level of industrial production is not particularly telling , it being basically sluggish , at least in  the mature countries, like US, Europe and Japan. Perhaps one could look at Emerging Countries  to get some indication  that perhaps the present situation is  not hopelessly  negative . The Institute of  International Finance, one of the most authoritative voice in the  financial world,  has published im its bulletin (January 26,2010), a precious data source about the flow of  private capital  into Emerging Economies . The data are presented synthetically in the following  tables . 

  Emerging Markets Economies : External Financing (billion dollars) 

In order to fully measure the dramatic changes of these flows, it must be remembered that the figure was for the year 2007 1200 billion dollars, the maximum ever reached, and that  it crashed to about half  of that figure in 2008 and kept  diminishing  again in  2009. The good news is that the forecasts for 2010 and 2011 are on the increase, quite strongly for the first of the two years. An interesting note is printed partly in bold on the side of these figures . “Such rapid move from famine to feast raises the obvious question of whether another global financial bubble is on the making , this time  in the key emerging economies , especially  Brazil China and India .Although  hit does not look  to be an imminent danger,  there are medium term risks”. This phrase may mean that since  the structure of the world’s financial sector has not improved, notwithstanding all the  words  recently pronounced by Governments on the matter, such an  increase of the financial flows may eventually prove dangerous. We might however have an optimistic take of these figures, and say that they show that investment opportunities are there, and that the capital is available  and willing to move  where it  expects to  get high profit with relatively small risks.  Or we could instead conclude that capital is there, but there are no good opportunities for it in the mature economies, which are still in the throes of the financial crisis.

Capital Inflows to Emerging  Economies,  by regions 

In fact , the figures  indicate a strong increase of investments in the Emerging Countries : Asia Pacific , gets the larger share (41.9%) of the capital inflows of 2010 , while Emerging  Europe  and Latin America are about  24% each   and Africa and MO is  slightly above 9%. One could conclude that the Emerging Countries, and especially the Asiatic  , are out of the crisis, also due to their strong internal  demand,     while the mature economies  are still seeing a weak demand and insufficient investment.  “The macroeconomic outlook  for capital flows  to (most) emerging countries  has never been so propitious...... For the foreseable  future, many emerging markets assets  would seem to offer   prospect of both  higher return and  less risk. “ The IIF concludes its analysis by publishing its   macroeconomic forecasts  for 2010 and 2011.The mature economies , negative in 2009, will grow 2.4% and  2,0% in the two years. Europe is supposed to be the laggard, growing  less than 2% in the two years. The emerging economies  -which managed to grow 1% in 2009- are expected to grow by 6,1% and 5.9% in the two years, with China and India leading with 10% and 9.5% in the first , and 8.5 % and 9.0 % in  the second.

Such data as published by  the IIF  point out to a  real world wide dislocation of the flow of investment in new productive capacity. Capital freely flows towards  perspectives of good profit and low risk. And the difference is not only related to the cost of labour, which in some industries is not so relevant,  but also the positive attitude of Governments toward new investments ,  the short time needed  to build up new capacity, the abundance of investment capital, and  finally the large  and young population with a great   drive to a richer way of life. American newspapers are already talking of the “Century of Emerging Countries “. It seems that what the economist have been looking for  so many years, a way to develop  underdeveloped countries ,  has  finally been  found, which is   very positive. However, the mature countries will have problems, and especially Europe, which has a weak central structure . The European Commission concentrated for years on  competition policy,  being certain that it would be an effective industrial policy, which it is not.  European productive capacity is quite large and powerful, but it must fight a very strong competition; and countries of old industrialisation , and  highly populated , have  many obstacles  to the  creation of new capacity . European Authorities are still  grappling with the aftermath of the great crisis, and do not seem to be interested in what is coming next.   

Source : IIF Institute of International Finance : Capital Flows to Emerging Market Economies, January 26 2010