Economic recession and capital outflows

There are many ways to measure the health of the world economy. The flow of private capital from the “Mature” countries to the Emerging ones is one of them. The Emerging Countries offer a higher rate of interest and a higher profit rate than the Matures ones. Therefore a good portion of the capital produced in the rich countries flows to the Emerging ones. This flow is measured by the Institute for International Finance (iif), which gives data for four groups of Emerging  Countries: Europe, including Russia; Asia, with China and India; Latin America, with Mexico, Brazil and Argentina; Africa and Middle East, with South Africa and the Gulf.

On September 2010 the iif estimated the flow of private capital to the Emerging Countries at the unprecedented figure of 1000 billion dollars. In January 2012, however, the figure has been re-calculated, as Europe, and also the USA, although in a better shape, are in a crisis, their economies being either in a recession or trying to get out of it.
“While there are a number of factors responsible, writes the iif, the proximate major cause (of this change)
is the onset of renewed financial turbulence in the Euro Area.... ” that has damaged the willingness and ability of investors and lenders in the region to supply finance to businesses.”

The estimate of total capital flow has therefore been reduced by 144 billion dollars. Table 1 presents the original forecasts for 2011 which was published in September 26, 2011, and its revision, published in January 2012. Such a large reduction of the outgoing flow of capital to Emerging countries is a clear sign that the rich Countries are in a recession, very visible in Europe, and less in the US. ”As sovereign debt problem deteriorated within the Euro Area in the second half of 2011, bankers in the region came under intense funding pressures...” writes the iif. In fact, the largest reduction, 61 billions, is due to   the figure for the European banks, which accounted in 2004-2007 for about 58% of   G3 private capital exports, and were later hit by the Euro crisis.  However, the revision has not strongly reduced the Direct Investments, so that the total Equity Investments is not much decreased.

A forecast for 2013

According the economic forecasts prepared by iif, and reproduced in table 2, the year 2012 appears as the lower point of the recession, when the rate of growth of Mature Countries will be at its lowest, and negative in Europe. The year 2013, however, is supposed to show signs of a better economic situation, with Europe coming back to some growth, and the US to a more comfortable rate. The year 2013 will perhaps see the reversal of the crisis, and the return to normal operations. The crisis may end in the 2013, but even in that year the outflow from Mature Countries to Emerging ones will be below the figures originally estimated for 2010.  In 2013 the total capital flows will go up to 893, indicating that the level of about 1000 billion would basically be the “normal” outflow of capital looking for better profit in Emerging Countries.

The outflow from  Emerging countries

The Emerging Countries receive a large amount of capital, but export also a considerable part of it as seen in Table 4. This outgoing flow may include the profits of the foreign investments, and some investments related to the flow of export of products towards the rich markets of America and Europe, for example logistic facilities. However, there are    also industrial and real estate investments, which may or may not be connected with the capital entering from abroad. The outflow from Asian Countries is about 86% of its total inflow. The figure is lower for Europe and lower again for Latin America, while for the Asia the outflow is higher than the inflow, as the oil Countries of the Gulf are by definition capital exporters. These countries have at the same time increased their reserves, which seems reasonable as the crisis in the Mature Countries creates fears and uncertainty.

The distribution of capital among the Emerging Countries
 
The crisis in Europe and in the USA had an important effect on the direction of the capital outflow. Asia reduced its share of the total flow and it is expected to keep on reducing it in 2013, while the European Countries have increased their share, and so has Latin America, which

Conclusion
 
What conclusion can we draw from these numbers? In short, private capital flows out of the old countries of Europe even in a recession. The volume is reduced a little, but not much.  European banks have been moving capital to the Emerging Countries in large quantities, and the recession has reduced the flow, but not cancelled it. At the same time, the economist say that you can get out of a recession only by investing, and producing more for export. But the capital for those investments is not there, it goes abroad. So the conclusion seems to be the   private capital is invested rather abroad than in the country, and the Governments have no money to invest, because they have to balance their books, and because they must not interfere in the economy.   It seems a perfect recipe not only for a recession, but for long term stagnation.

Table 1 iif Estimates for Private Capital Flows to Emerging Countries from Mature ones for 211 and Revision, in billion dollars

Table 2 iif Estimated percentage growth in some countries 2012-2013

Table 3 iif Estimates for 2012 and 2013, and differences between 2012 and 2011, and 2013 with 2012 in billion dollars

Table 4 Private inflow and outflow of Emerging Countries billion dollars

The – means an increase of reserves
 

Table 5 Distribution of capital flows by areas in billion dollars