Since 2015, many emerging countries have seen their economic growth slow significantly. The gradual rise in the Fed’s effective rates marks an economic and monetary divergence that weighs on their currencies and leads to new capital flows.
Between 2009 and 2014, emerging countries as a whole received $2 trillion in net capital inflows, according to the Institute for International Finance (IFF). Capital flows are now reversing: net capital outflows from emerging countries exceeded $600 billion in 2015 (more than a quarter of the total amount of capital received by these countries over the past six years). How can these flows be measured?
First approach: gross capital flows: gross inflows correspond to the net amount of acquisitions and sales of domestic assets by non-residents of the country in question. Gross outflows of capital refer to the net amount of acquisitions and sales of foreign assets by residents of the country in question. This method of measuring capital flows makes it possible to distinguish between the residence of operators.
Second approach: net capital flows: unlike gross capital flows, net capital flows do not allow for a distinction to be made between the origin of the flows. Net capital inflows thus correspond to all capital entering the country (acquisition of domestic assets by residents and non-residents), while net capital outflows correspond to all capital leaving the country (purchases of foreign assets by residents, sales of domestic assets by non-residents).
While until the 1990s net flows more or less corresponded to gross capital flows, the increased volatility of the latter (due to the extreme sensitivity of international investors to global factors and monetary policy shocks) has led the literature to consider gross flows as a better measure of capital flows.
Thomas Lorans
Reference:
Forbes and Warnock: « Capital Flow waves: Surges, stops, flight and retrenchment, » in Journal of International Economics, 2012
Stiglitz, Rashid: « Closing Developing Countries’ Capital Drain, » Project Syndicate, 2016
