Benefits and risks from financial liberalisation

Transcription

1 Benefits and risks from financial liberalisation Marcel Fratzscher European Central Bank World Bank BMZ GIZ Workshop "Managing Risk for Development" in preparation for the World Development Report 2014 Berlin, December 2012 The views expressed here are those of the author and do not necessarily reflect those of the ECB. 1

2 Three main points Aggregate stability key for development Dilemma: fostering development creates risks Common trade-off: reducing risk vs. managing risk Point #1: Financial liberalisation good for growth but needs to be managed and sequenced well Point #2: Poor public institutions as single most important source of risk for stable finance Win-win: strong institutions both reduce aggregate risk and manage/transfer risk Risk sharing highest with openness and good institutions Point #3: Financial protectionism major risk today, need for policy coordination 2

3 1. Financial liberalisation is good for growth... Real per capita GDP growth (in %) grow th +/- 1 std.dev. Source: Bussiere, M. and M. Fratzscher, Financial openness and growth: short-run gain, long-run pain?, Review of International Economics 16(1), growth accelerates after liberalisation of capital account 3

4 ... but also volatility in finance and growth rises 10.0 Portfolio inflows to GDP ratio (in %) portfolio inflow s/gdp +/- 1 std.dev. Source: Bussiere, M. and M. Fratzscher, Financial openness and growth: short-run gain, long-run pain?, Review of International Economics 16(1), highly volatile and diverse portfolio flows after liberalisation of capital account 4

5 The role of sequencing Countries that liberalised their domestic financial sectors first benefited more from liberalisation through higher growth 5

6 6 2. How to deal with risks of sudden stops and capital flow volatility?

7 Push versus pull: Drivers of capital flows Most of EMDCs capital flows during crisis explained by push factors, but post-crisis by pull factors (esp. Asia, LatAm) Push factors Pull factors % of total capital flows explained by factors Pre-crisis Crisis Post-crisis Pre-crisis Crisis Post-crisis ALL countries EM Asia EM Europe Latin America Africa/Middle East Advanced Europe Other advanced Source: Fratzscher, M., Capital Flows, Push versus Pull Factors and the Global Financial Crisis, NBER-Sloan project on the Global Financial Crisis, Journal of International Economics. 7

8 Sudden stop in crisis strongly linked to poor institutions country risk quality of institutions financial openness current account-gdp ratio Source: Fratzscher, M., Capital Flows, Push versus Pull Factors and the Global Financial Crisis, NBER-Sloan project on the Global Financial Crisis, Journal of International Economics. 8

9 3. Managing risks: Risk sharing openness and institutions Risk sharing across countries Smoothing private consumption by de-linking consumption from output Unilateral Version: test β=0 Bilateral Version: test γ=1 9

10 Link of sudden stops to risk & institutions Source: Fratzscher, M. and J. Imbs, Risk sharing, finance and institutions in international portfolios, Journal of Financial Economics 94: , December

11 4. The risk of financial protectionism "This crisis started in the developed world, it will not be overcome through quantitative easing policies that have triggered a monetary tsunami, have led to a currency war and have introduced new and perverse forms of protectionism in the world." President Rousseff of Brazil (2012, FT 29 March 2012) 11

12 Global financial stability: Externalities from crisis responses Monetary tsunami capital flows, global liquidity Currency war Financial protectionism Capital controls and FX policies in EMEs as forms of protectionism but also monetary policy and other policies of advanced economies? 12

13 Externalities The Example of Brazil Region Market Size Dragon Play Control Risk Firstdifferencdifferencdifferencdifferencdifference Log- First- Log- First- Log- First- Log- difference difference difference Control Brazil *** *** *** *** *** *** *** *** (0.003) (0.061) (0.003) (0.062) (0.003) (0.061) (0.003) (0.062) Control ExBrazil/Externality * ** (0.009) (0.187) (0.008) (0.308) (0.008) (0.139) (0.010) (0.232) ω benchmark 0.847*** 0.975*** 0.847*** 0.975*** 0.845*** 0.975*** 0.845*** 0.974*** (0.021) (0.043) (0.021) (0.043) (0.022) (0.044) (0.022) (0.043) Region 0.012** 0.207*** (0.005) (0.052) Market Size (0.014) (0.137) Dragon Play 0.025** 0.416** (0.009) (0.194) Control Risk ** ** * is significant at the 1% level, ** at the 5% level, *** at the 1% level (0.008) (0.070) Macro Controls Y Y Y Y Y Y Y Y Observations 1,086 1,086 1,086 1,086 1,086 1,086 1,086 1,086 R-squared Source: Forbes, Fratzscher, Kostka and Straub M., Bubble Thy Neighbor: Portfolio Effects and Externalities from Capital Controls, NBER Working Paper No , May 2012.

14 Findings on externalities of capital controls Externalities from capital controls substantial Risk of triggering competitive devaluations Raising incentives for others to implement capital controls Evidence for diversion of capital flows to neighbors and other EMEs Call for global coordination on capital flow management 14

15 Policy levers what pecking order to ensure that finance supports stability and development? Macroeconomic Monetary, fiscal, structural policies Prudential Macro- and microprudential Financial intermediation to reduce and hedge risks Financial market development, depth and sophistication Institutional quality and environment flight-to-safety phenomenon makes capital flows to EMEs often highly pro-cyclical and hence detrimental Link to quality of institutions and country risk Financial protectionism, capital controls and FX policy interventions 15

16 Three main points Point #1: Financial liberalisation good for growth but needs to be managed and sequenced well Point #2: Poor public institutions as single most important source of risk for stable finance Strong institutions as insurance against sudden stops and volatility Risk sharing (consumption smoothing) highest with openness and good institutions Point #3: Financial protectionism major risk today Wrong lesson from the and crises Reflects a coordination failure need for policy coordination at global level 16

17 17 Appendix

18 The intertemporal trade-off Portfolio investment inflows lead to significantly higher growth in short-term and lower growth in long-term may explain why evidence for overall positive growth effect is so weak in literature 18

19 2. Rising risk of financial protectionism Mean capital controls Dispersion capital controls Mean capital controls Dispersion capital controls 19

20 Two episodes with rising controls Raise Reduce 20