Rakesh Mohan (BIS) report on Capital Flows and Emerging Economies
The Committee on the Global Financial System (CFGS) of the Bank for International Settlements established a Working Group under Dr. Rakesh Mohan of the Reserve Bank of India (RBI) to study capital flows and emerging economies. The Group submitted a very interesting and valuable report last month.
The group was originally set up primarily to study the implications of capital inflows for emerging economies, but the changed environment has made it a very valuable study of how the global crisis is impacting emerging economies and how these economies are responding to the crisis. The Working Group should be commended for interpreting their mandate broadly and covering the events of 2007 and 2008.
Even to people like me who have been following recent developments in several emerging countries keenly, there is a wealth of fascinating data and case studies in the report. Most of us find it easy to follow what is happening in the US and in our own country. The experiences of other countries – especially emerging economies – is not well documented in the publicly accessible literature. The blogosphere is not exactly littered with Bloomberg terminals and Datastream subscriptions, and even those with access to these find that quality reporting and analysis is not readily available for non US economies.
The conclusions of the report are also well balanced and sensible recognizing the beneficial effects of capital flows – particularly foreign direct investment and foreign portfolio equity investment. It also lays stress on the development of the domestic financial sector including pension funds. There is a clear recognition that the price-stability focus of monetary policy can be undermined by paying too much attention to exchange rate objectives.
The group was clearly racing against time to finish the report as events pushed them far beyond their original mandate. As a result, the proof reading of the report has probably been a little spotty as well. I spotted a couple of errors that would almost certainly have been eliminated by a more leisurely proof reading process:
- In three different tables (C2, E1 and E3), the report states that the market capitalization of India’s stock market at the end of 2007 was 317% of GDP. Though end-2007 was the height of the stock market bubble in India, 317% is still nearly twice as large as the real number. I suspect that somebody carelessly added up the market capitalization of the BSE and the NSE without correcting for the double counting resulting from most large companies being listed on both exchanges. (My preferred rough and dirty measure is the market capitalization of the BSE, but more refined estimates are certainly possible). I am sure that given more time for proof reading, this error would have been corrected.
- While discussing Korea, the report states (page 120): “Following the Lehman failure, the spread of CCS [Cross Currency Swaps] over interest rate swaps widened significantly, and both banks and corporate borrowers faced a sharp increase in the cost of swapping borrowed dollars into local currency.” My memory was that the problem was the reverse – in late 2008, Korean borrowers were swapping local currency into dollars to repay maturing dollar debt and it was the cost of doing this that rose sharply. Graph H11 confirms that this was indeed the case: the spread “widened” to a huge negative value (the graph shows that the CCS rate itself went to zero and then turned slightly negative). Again, a less hurried proof reading would I am sure have caught the error.
But this is mere nitpicking about a report that I enjoyed reading. I strongly recommend that all those interested in how emerging markets are coping with these troubled times should read the whole report especially Chapter H on the developments in 2008.
Posted at 3:56 pm IST on Mon, 16 Feb 2009 permanent link
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