| Will capital inflows boom again as countries recover from recession? Some think that there will be no boom since recent international financial turmoil has dramatically changed the financial landscape for emerging markets. After these financial crises, the argument goes, the market has changed for good: foreign investors who were burned are unlikely to return at the same scale; and even if they did, their proven unreliability is likely to weigh heavily in policymakers’ minds throughout the region and prompt capital controls. The redesign of aspects of the international financial architecture would further support this change towards financial stability by impeding capital flows.
However, others see a new boom in capital inflows on the horizon. According to this view, investors and policymakers have short memories (and little prudence) and architectural reforms have little effect. Pessimists in this camp expect a repeat of a cyclical boom followed by a corresponding bust in short order. Optimists, however, point to recent surges in foreign direct investment (FDI), hailed with excitement and submitted as evidence of a transformed financial landscape. In their view, the new boom will be dominated by FDI, which would lend stability to capital inflows.
What to make of all these views of the new financial landscape and, more importantly, what to do on the policy front? A key policy issue is the extent to which the composition of capital inflows matters for macroeconomic risks and economic development. In particular, is FDI "different?" Should we adjust for a switch to FDI-dominated capital inflows? Is policy intervention designed to alter the composition of capital inflows important? If so, what are the market failures and what policies could correct them? In particular, under what conditions should FDI be promoted? And what policy instruments are effective to achieve the objectives?
This seminar will consist of two panels of high-level experts and policymakers. The first panel will discuss whether a new boom in capital inflows is forthcoming and the role FDI is likely to play. A key question for this panel is whether the new wave of capital inflows will be more stable or just the boom phase of another cycle soon to come. The second panel will focus on the policy objectives that should be pursued and the instruments to be used to affect the composition of capital inflows, given recent experiences and new realities. A key issue for this panel is whether there should be a policy switch toward the promotion of FDI.
Contact: Beatriz Belmonte BeatrizD@iadb.org
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