>Flash Economics (ECONOMIC RESEARCH)

International capital flows are more destabilising than efficient

In principle the liberalisation of capital flows was supposed to enable an efficient international allocation of savings, thus increasing global long-term growth. However, we see that international capital flows are above all destabilising and that only a small portion of these flows allocate capital efficiently. We provide several examples of the destabilising or inefficient nature of international capital flows:

■ capital flows to and from emerging countries since 2005; finance speculative investments (equities) or households’ foreign currency debt;

■ carry trades in low-interest-rate currencies to invest in high-interestrate currencies, until the crisis;

■ international financing of real estate, i.e. of the household savings shortfall in the United States, and even within the euro zone, in Spain for example. The international financial system must therefore absolutely move towards the financing of productive investments and growth so that in the end the liberalisation of capital flows is not rejected.

In principle the purpose of the liberalisation of capital flows is to enable an efficient allocation of savings, with countries having surplus savings financing economically and socially profitable projects in other countries. However, we see that this objective is far from being reached:

■ on the one hand, and this has been frequently described and criticised, international capital does not flow from rich countries (with high per capita capital) towards poor countries (with low per capita capital), since it mainly flows to the United States, which has a chronic external deficit, from emerging countries (except in Latin America and Central Europe) and Japan, which have external surpluses ;

■ on the other hand, when we look at the nature of the capital flows, we see that corporate capital flows (in productive capital, direct investments) are small compared with financial capital flows.

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