Lecture 09 - webnotes - Developments in global capital...

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Developments in global capital markets Benefits of liberalizing the capital account Costs of liberalizing the capital account
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Developments in global capital markets Already seen the brief outline of developments in the area of international capital… From 1800 to 1850, negligible amounts of financial capital crossing national borders. But after 1850, things decidedly picked up.
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Developments in global capital markets 1865 to 1913: British invest as much in the “developing world” as in the UK itself. And they invested more than this amount in North America and Australasia alone. Initially, flows predominated by portfolio capital (stocks & bonds).
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Developments in global capital markets Brings about the reduction in the UK’s role as global financial hegemon. The composition of this debt was mostly sovereign in origin (about 80%). Global capital dominated by the financing of
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Developments in global capital markets Declining prominence of international financial flows generated by: 1.) the reluctance of the US to assume the role of hegemon, 2.) the disorder of the interwar period in terms of commercial relations,
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Developments in global capital markets Long-run financial flows, thus, grind to a halt. One interesting development was the rise of “hot money” after the Great Depression. Speculators rushed to capitalize on currency fluctuations generated by non-credible
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Developments in global capital markets Total stock of cross-border capital: <$40 billion in 1950 (or 2% of world GDP). Total stocks of FDI alone increased from $628 billion in 1982 (5%) to $6,848 billion in 2001 (21%). In the same year, there was an additional $5,100 billion in equity (16%) and $7,200
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Developments in global capital markets In a related development, we see the rise of multi-national enterprises (MNEs). Nothing new here…plenty of precedents, even pre-WWI. E.g. Ford, Hormel, HSBC. But again, the revolution is in scale (but also
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Developments in global capital markets By 2001, total sales of foreign affiliates of MNEs were $18,517 billion, representing 58% of world GDP. (Not necessarily a good figure: gross versus value-added) Exports of foreign affiliates of MNEs were
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Developments in global capital markets Key to this revolution has been the dismantling of capital controls. Implemented to help reconcile conflicting policy objectives (fixed exchange rates, autonomy of monetary policy) by keeping the capital account closed. Gives rise to the so-called
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Came in the form of direct prohibitions on capital transactions and associated transfer of funds. And in the form of indirect (or market-based) controls designed to raise transaction costs. E.g. dual or multiple exchange rate systems,
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Lecture 09 - webnotes - Developments in global capital...

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