PSD Blog - The World Bank Group

Today in Capital Controls

Yesterday I suggested that emerging market economies, rather than the United States, were better poised to criticize China's currency policy. It looks like, rather than criticizing China's policy, many are simply trying replicate it. Brazil and Taiwan are leading the way:

Asian currencies came under pressure on Thursday as a move from Brazil to further curb foreign inflows sparked fears that other countries would follow suit. Brazil moved overnight to close a loophole that had allowed investors to avoid a 2 per cent tax on foreign investment in equities and bonds announced last month.

Speculative flows have now reached the point where many emerging market currencies have hit levels that threaten to undermine their export sectors.

So far most emerging market economies have managed the problem by intervening in currency markets to slow the appreciation of their currencies. However, Brazil and Taiwan have taken more dramatic action, imposing capital controls designed to limit the appreciation of their currencies.

Speculation has risen that other countries will follow their lead.

“Recent measures from Brazil and Taiwan curbing capital inflows send a clear signal: emerging market policymakers are far away from accepting a sustained reallocation of portfolio capital from the west, and its liquidity and currency implications,” said David Bloom at HSBC.

Taiwan's decision to ban foreigners from putting money into time deposits seems to be working. Investors have pulled out roughly 12 percent of this 'hot' money. Taiwan's success, and Brazil's apparent determination, are likely to encourage others to take a more assertive stance.

Low interest rates in the West, coupled with a fixed renminbi and weaker dollar, have left many emerging markets somewhere between a rock and a hard place. They now must try to avoid excessive currency appreciation without appearing hostile to the foreign investment that is fueling much of their growth.

The global economy is unlikely to reach any sort of equilibrium for a very long time.

Is the US the appropriate renminbi critic?

Free Exchange has observed over the past few days that the blogosphere, financial press, and political punditry have put forth a plethora of opinions about Chinese economic policy. Let's take a look at some of the latest:

Bill Owens argues for closer cooperation in just about everything:

The US-China relationship is a vital interest for the two countries and the world. Throughout history, great powers have tended to become adversaries. Now, for a few years, we have a chance to break that cycle. It will take strong and enduring commitment on both sides. But a new and engaging relationship is imperative for our common good

Martin Wolf puts wishful words into the mouth of Barack Obama:

At a time of such weak global demand, yours is a 'beggar thy neighbor' policy. You complain about the protectionist actions I have implemented. But their impact will be trivial compared with China's 'exchange rate protectionism'. This policy will shift the costs of adjustment on to China's trading partners.

The Lure of Local Bonds

IFC announced yesterday that it will issue a $43m local currency bond in Central Africa, a first for the World Bank institution, and also a first for a non-local financial institution. This is IFC's second local currency bond in Sub-Saharan Africa, following its issuance of a West African Kola Bond in late 2006:

The 20 billion Central African francs ($43 million equivalent), five-year tenor bond will be listed on the regional exchange in Libreville and on the Doula Stock Exchange. It will be tax-exempt in all six countries in the Economic and Monetary Community of the Central African zone. The countries are Cameroon, Central African Republic, Chad, Congo, Equatorial Guinea, and Gabon. All proceeds will be reinvested in the zone.

IFC's timing is quite prescient. As the recovery from the crisis continues to be lopsided, strongly favoring emerging markets, there should be substantial outside investor interest in these types local-currency bonds (see previous post).

Furthermore, increased dollar volatility will enhance the attractiveness of local currency bonds in two ways. First, judging by the market's negative reaction to Ben Bernanke's dollar reassurances, foreign investors should be more willing to take on local currency risk, as they remain convinced that dollar depreciation will continue for some time.

Second, while foreign investors seem sanguine about the dollar's weakness, local investors from fragile emerging markets, such as those in Central Africa, are more likely to recall the dollar's upside potential. Should another crisis occur, triggering a flight to safety along the lines of what we saw in the aftermath of last year's crisis, emerging market currencies will be the first to fall. Local currency bonds offer a layer of insurance against the damage that such a precipitous outflow of capital can cause, making them an attractive option for local businesses and investors alike. 

Good News in Migration

A few months ago, I attended the World Bank's conference on Diaspora for Development, hosted by Dilip Ratha, lead economist at the World Bank. The general feeling at that time was that remittance flows would contract significantly this year, but, paradoxically, would become a more important source of external financing in many countries, as foreign direct investment had dropped by up to 50 percent.

Since then, the situation for migrants has improved. Today, the World Bank released its Migration and Remittance Trends 2009 report, which features several upward revisions in remittance flows. Dilip Ratha's People Move blog has the highlights:

Newly available data show that officially recorded remittance flows to developing countries reached $338 billion in 2008, higher than our previous estimate of $328 billion. Based on monthly and quarterly data released by some central banks and in line with the World Bank’s global economic outlook we estimate that remittance flows to developing countries will fall to $317 billion in 2009. This 6.1 percent decline is smaller than our earlier expectation of a 7.3 percent fall.

China vs. India: Which is better for doing business?

Editor's Note: Peter Kusek is an Investment Policy Officer with the Investment Climate Advisory Services of the World Bank Group.

Doing Business has just published its seventh annual report for 2010.  As in the past, it includes its flagship Ease of Doing Business rank, which is once again led by high-income economies such as Singapore, New Zealand, Hong Kong (China) and the United States.  That’s not a surprise. 

What some of us might however not expect is to find countries such as Georgia, Saudi Arabia or Mauritius among the top 20.  Does this mean that these countries are amongst the world’s 20 most desirable and attractive business destinations?  Well, yes and no, depending on how you define attractiveness.  Let’s do the following quick business exercise together:

Agricultural FDI: Global land grab or good business?

Editor's Note: Kusi Hornberger is an Investment Policy & Promotion Specialist with the Investment Climate Advisory Services of the World Bank Group.

Despite the recent downturn in global FDI flows and predictions of gloomier times to come for cross border investment flows, there has been a recent increase in FDI by wealthy investors from resource poor countries. These investors have been snapping up large plots of land in developing countries for the development of agriculture exports. For the most part the deals have come from wealthy investors or state development funds in resource-poor countries into poor resource-rich countries, such as the lease of 30,000 hectares by the Abu Dhabi Fund for Development in Sudan.

Revisiting the ABCDEs of East Asian development

Editor's Note: Swarnim Waglé is a consultant with the Investing Across Borders indicators project of the World Bank Group.

Ha-Joon Chang, a teacher at the University of Cambridge in England, describes himself as a “heterodox” economist and has been a long-time critic of the World Bank and the IMF. A few weeks ago, he was invited to be a keynote speaker at the recent 2009 Annual Bank Conference on Development Economics (ABCDE) in Seoul, where he revived an old debate on industrial policy that many might have considered settled had the latest economic crisis not struck.