Should Rigorous Controls Be Imposed on Transnational Capital Flows?
I. INTRODUCTION
Transnational capital flow is a term coined to describe the movement of capital across national boundaries. International financial and capital flows have experienced a phenomenal upsurge during the late twentieth century. According to the latest estimates, foreign exchange to the tune of one to two trillion US dollars is transacted internationally every day. Significantly, exchanges in trade and services constitute only a tiny fraction of these transactions, while the majority is composed of movement of shortterm capital and foreign investment. While the benefits of such flows are manifold, there are negative side-effects too. Unfettered movement of capital in developing countries has triggered off several economic crises in recent history and there is a compelling case for tempering such flows through imposition of adequate controls.
I.i Types of Global Capital Flows
Transnational capital flows can be broadly classified into the following categories:
1) Foreign Direct Investment (FDI): Acquisition of companies, physical investment in plants and equipment. 2) Foreign Portfolio Investment: Investments in capital markets.
3) Loans and credit issued by International Banks to local lenders.
4) Currency transactions, primarily as part of currency hedging strategies.
5) Global insurance.
I.ii Benefits of Free Capital Flows
Free Capital Flows lead to greater flexibility in international financial markets and financial transactions across national boundaries, contributing to overall development of the economy and a rise in living standards, because of increased foreign investment and financing. In such an environment, investors also enjoy higher returns and better portfolio diversification. This translates into deepening efficiency and sophistication of domestic financial markets, by letting the most efficient investors earn profit and ensuring removal of inefficient investors, leading to efficient resource allocation.
II.
Transnational capital flow is a term coined to describe the movement of capital across national boundaries. International financial and capital flows have experienced a phenomenal upsurge during the late twentieth century. According to the latest estimates, foreign exchange to the tune of one to two trillion US dollars is transacted internationally every day. Significantly, exchanges in trade and services constitute only a tiny fraction of these transactions, while the majority is composed of movement of shortterm capital and foreign investment. While the benefits of such flows are manifold, there are negative side-effects too. Unfettered movement of capital in developing countries has triggered off several economic crises in recent history and there is a compelling case for tempering such flows through imposition of adequate controls.
I.i Types of Global Capital Flows
Transnational capital flows can be broadly classified into the following categories:
1) Foreign Direct Investment (FDI): Acquisition of companies, physical investment in plants and equipment. 2) Foreign Portfolio Investment: Investments in capital markets.
3) Loans and credit issued by International Banks to local lenders.
4) Currency transactions, primarily as part of currency hedging strategies.
5) Global insurance.
I.ii Benefits of Free Capital Flows
Free Capital Flows lead to greater flexibility in international financial markets and financial transactions across national boundaries, contributing to overall development of the economy and a rise in living standards, because of increased foreign investment and financing. In such an environment, investors also enjoy higher returns and better portfolio diversification. This translates into deepening efficiency and sophistication of domestic financial markets, by letting the most efficient investors earn profit and ensuring removal of inefficient investors, leading to efficient resource allocation.
II.