Barriers and Opportunities for Enhancing Capital Flows
In the COMCEC Member Countries
58
4 – ENHANCING CAPITAL FLOWS AMONG THE COMCEC
MEMBER COUNTRIES- OPPORTUNITIES AND OBSTACLES
The opportunities to enhance capital flows among the COMCEC Member Countries – and the
obstacles that they must overcome in order to do so – are wide-ranging and, are closely
associated with the presence of a number of “pull factors” in recipient countries. These internal
factors include a country’s institutions, policies, structural reform, and macroeconomic
fundamentals. The degree of development of these factors determines the strength of the
financial systems, rule of law, transparency, taxation regimes and political stability, which
ultimately influence investor confidence – and sway decisions by investors.
4.1. HOWREFORMS CAN AFFECT CAPITAL FLOWS
Macroeconomic and financial stability, transparency and effective structural policies have a
significant role to play in supporting investor confidence in the context of capital flows. For
many countries, structural reforms help economies to better absorb capital flows. Such
reforms may include steps to deepen domestic bond and equity markets, develop financial
products without undue risk, and strengthen financial regulation and supervision, while
streamlining rigidities.58
In the case of FDI – in general terms a longer-term form of investment that is often linked to
infrastructure – large-scale funds are required to be committed over a long period. Local bond
markets that are well developed and integrated are able to facilitate the raising and
intermediation of such resources. Deep capital markets help to increase the absorptive
capacity of the recipient country, and are particularly crucial in offsetting volatility that can be
caused by sudden inflow surges.
In this context, regulatory frameworks are highly significant in fast-growing economies, where
investors may have reservations about the rule of law and may question whether domestic and
international rulings are upheld.
Examples of measures to enhance capital flows can include opening up privatisation
programmes to foreign investors; opening up more sectors to investment and reducing sector
restrictions; raising standards of treatment of foreign affiliates –for example, through
guarantees of legal protection, free transfer of profits and repatriation of capital and FDI-
specific laws that ensure foreign companies are treated in the same way as domestic ones.
The implementation of supporting reforms depends largely on the existence of appropriate
government institutions and political will. Having measures in place to help overcome
administrative barriers is important to ensure a level playing field for all investors; barriers
can provide an opening for corrupt practices and can increase transaction costs of investment
5 MF (2012), ‘The liberalisation and management of capital flows: an
institutional view’