The Fickle Charms of Private Global Finance
Despite all the hype, greater access to private international capital has not been much use to most emerging markets and developing countries over the past two decades. The record suggests that solutions to current macroeconomic dilemmas that still rely on net capital inflows are likely to end in tears.
NEW DELHI – Once again, emerging markets are on the capital-flows roller coaster – one no less dizzying for being so familiar. And once again, the highs and lows of financial-market swings in these economies are mostly generated by external forces, not national policies. But the possibility that even the smallest domestic mistake could send them into a tailspin still looms large.
The past 18 months have provided ample evidence of this. According to the Institute of International Finance, total capital flows to emerging markets fell by 13% in 2020, to $313 billion. But this headline figure conceals sharp changes, from a dramatic decline in March 2020 to a recovery in the following month and significant volatility thereafter.
These flows have remained strong so far in 2021, at $45.5 billion in April and $13.8 billion in May, mostly to finance the purchase of emerging-market debt securities. While total global debt fell by $1.7 trillion, to $289 trillion, in the first quarter of 2021, emerging-market economies’ debt increased by $600 billion, to $86 trillion.