Reasons for International Capital Movement 1.

Tariff and Non-tariff There are several ways in which this line of inquiry might be extended productively. In the traditional analysis treating international capital mobility as a generic phenomenon, and resting on the standard HeckscherOhlin framework, workers are generally expected to become increasingly protectionist as owners of capital become more mobile since import barriers should induce tari-jumping foreign investments that would raise local demand for labor (e.g. Chase, 1998). But allowing for industry specicity among types of capital upsets this picture, since real wages may fall if capital is actually more internationally mobile in (export) sectors than in those industries in which taris are put in place. The best next step here would probably be to incorporate these real wage eects in a fully-elaborated model of tari-setting along the lines set by Grossman and Helpman, but allowing for crossindustry variance in international capital mobility (Hiscox, 2004) Capital is tradable in the same way as many goods and services are: it can be imported or exported at a price which reflects international demand and supply conditions. As a result, much of the analysis pertaining to trade in goods and services applies with equal force to capital movements. Many of the lessons from trade policy also apply to capital flows and the main purpose of this short article is to point out some of these lessons. Free trade is typically the best trade policy, no matter whether it is trade in goods, services or capital. But if investor behaviour and the prevailing policy environment are not conducive to immediate free trade, the choice of instrument for controlling capital flows becomes important. Here, the trade policy debate has some important lessons to offer. Most significantly, tariffs and other price-related restrictions are preferable to quantitative restrictions or prohibitions because: (i) they cause less rent seeking, and (ii) they do not insulate the domestic market from price changes and innovations in international markets (Schuknercht, 1998) 2. Low Relative Wage

For a given size of the current account deficit, a high share of savings and investment increases the likelihood of a reversal. High investment and savings can increase future exports and output growth, thereby contributing to narrowing current account imbalances (Razin, n.d). The identified behaviour of gross capital flows allows us to shed light on the sources of fluctuations in economies open to capital flows. The evidence runs contrary to the view that capital flows are mostly driven by productivity shocks, since such shocks would generally imply a similar behaviour towards domestic assets by foreigners and domestic agents. More generally, our empirical evidence points to crises affecting foreign and domestic agents asymmetrically. Examples of models where such asymmetry plays an important role include models with asymmetric information and models of sovereign risk (Broner, Didier, Erce, & Schmukler, 2011) 3. Higher per Capita Income A comparative look at the distribution of international investments at the end of the 20th century shows that the contrast between now and then is stark, regardless of minor quibbles over the accuracy of preWW1 investment statistics. At roughly 2900 billion US dollars, investment liabilities of countries with a GDP per capita of less than one-third of the high-income (OECD) countries accounted for only 12.5% of global investment stocks in the years 2000 and 2001. By historical standards, poor countries are marginalized in the contemporary global financial market (Schularick, 2006). Two conclusions from this literature are especially relevant for our analysis. First, a substantial share of the cross-country inequality in income per capita comes from cross-country dierences in TFP sees Hall and Jones (1999) and the subsequent literature on development accounting reviewed in Caselli (2004). The economic takeo of a poor country, therefore, results from a convergence of its TFP toward the level of advanced economies (Gourinchas & Jeann, 2009) 4. Raw Materials

Looking back on the crisis, the United States, like some emerging-market nations during the 1990s, has learned that the interaction of strong capital inflows and weaknesses in the domestic financial system can produce unintended and devastating results. The appropriate response is not to try to reverse financial globalization, which has conferred considerable benefits overall. Rather, the United States must continue to work with its international partners to improve private-sector financial practices and strengthen financial regulation, including macroprudential oversight. The ultimate objective should be to be able to manage even very large flows of domestic and international financial capital in ways that are both productive and conducive to financial stability (Bernanke, Bertaut, DeMarco, & Kamin, 2007). As inflationary pressures emerge due to price hikes in raw materials and oil and surges in capital inflows, the sustainability of the currency exchange rate policies and practices once again needs extra attention in Asia. Against this background, the remaining sections examine the source of reserve growth, focusing on capital flow movements, exchange rate managements, and monetary policy discipline; including sterilization interventions exercised in selected countries in order to assess the current policies and their sustainability (Terada, 2005)

Works Cited

Bernanke, B. S., Bertaut, C., DeMarco, L., & Kamin, S. (2007). International Capital Flows and the Returns to Safe Assets in the United States. New York: Federal Reserve. Broner, F., Didier, T., Erce, A., & Schmukler, S. (2011). Gross Capital Flows: Dynamics and Crises. Geneva: World Bank. Gourinchas, P.-O., & Jeann, O. (2009). Capital Flows to Developing Countries: The Alloccation Puzzle. Washington: Peterson Institute for International Economics. Hiscox, M. J. (2004). International Capital Mobility and Trade Politics: Capital Flows, Political Coalitions, and Lobbying. Economics and Politics , 16 (3), 253-258. Razin, A. (n.d). International Capital Flows: Sustainability, Sudden Reversals, and Market Failures. Schuknercht, L. (1998). A Simple Trade Policy Perspective on Capital Ground. Geneva: World Trade Organization. Schularick, M. (2006). A Tale of Two Globalizations: Capital Flows From Rich to Poor in Two Eras of Global Finance. Berlin: Free University of Berlin. Terada, A. (2005). Foreign Exhange Reserve, Exchange Rate Regimes, and Monetary Policy: Issues in Asia. ERD Working Paper , 61, 1-42.