The Role of Capital Flows to Sustainable Growth in Emerging Markets 2023 Michel Camdessus Central Banking Lecture

In an integrated world where financial globalization has seen an accelerated movement in capital across borders, many are pressing the pause button to reassess the strategy of relying excessively on external capital flows as a growth driver in times of global volatility. Lesetja Kganyago, Governor of the Reserve Bank of South Africa, addressing the tenth annual Michel Camdessus Central Banking Lecture 2023 organized by the International Monetary Fund, spoke at length on how emerging markets could leverage the benefits of capital flows for sustainable growth by listing out a set of best practices to optimize results. He underscored the importance of the quality of institutions in making the right policy choices and the quality of human capital empowered to run them, with the capacity to direct capital inflows into productive activities

- Jennifer Paldano Goonewardane.

 

Investments and economic growth have lulled during periods of global financial volatility. The financial crisis of 2007-2008, the COVID-19 pandemic, and

Russia’s invasion of Ukraine and its fallout have had significant economic and social impacts on countries worldwide. Inefficient leadership and mismanagement of capital flow over many years is another reason for slow growth. The most affected countries struggle to narrow their current account deficits amid an inability to repay or refinance sovereign debt.

While governments’ dependence on external capital inflows is historical, their efficient channeling was not always the norm. Inadequate macroeconomic policy and poor institutional frameworks were some reasons for the failure. While even the developed world’s over-reliance on capital inflows amid sizeable current account deficits has rendered them desperate, as witnessed during the Eurozone sovereign debt crisis, capital flows for growth are not without benefits.

The role of capital flows in a financially globalized world has been varied. Two to three decades ago, the role of capital flows was considered with favor, accompanied by calls for liberalizing it. Today, economists and sceptics look at it with caution.