ABSTRACT
Emerging market economies have witnessed sharp swings in capital flows in recent years. From a high of nearly $1.3 trillion in 2007, net private capital flows to these countries dropped to roughly $600 billion in 2008. The recovery thereafter has been short-lived, with another downturn marked by financial turmoil, debt deleveraging and economic slowdown in the eurozone. Taking a slightly longer view, international capital flows to emerging-market economies (EMEs) seem to have entered their fourth major cycle in the past fifteen years (1996–2011), with the attendant features of boom, bust and then recovery. The first dip corresponded to the Asian crisis, when there was a mass exodus of private capital from Thailand and then other East Asian economies, bringing in its wake financial contagion, collapse of stock prices and currency values and huge increases in private indebtedness across economies. This was soon followed by many more EMEs – Brazil, Russia, Turkey, Argentina and other Latin American countries – falling into financial crisis and recession. This marked the second cycle of international capital flows, which hit its worst point in 2002. International capital’s ‘flight to safety’ from emerging markets in 2008, due to a sharp decline in global investors’ risk appetite in the aftermath of the collapse of financial institutions in the United States, marked the third major dip. With the latest forecast of $700 billion of net private capital flows for 2012, we are yet to reach the end of the fourth cycle. The centre of trouble for the last two cycles in capital flows is, notably, the core metropolitan centres rather than the periphery.
