Barriers and Opportunities for Enhancing Capital Flows
In the COMCEC Member Countries
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Conclusions
Caveats notwithstanding, the preliminary analysis conducted here provides initial evidence
of the likely influence of a business environment (BER) category on private capital flows.
This analysis suggests that it is the areas of financing, market opportunities and the foreign
trade and exchange regimes that are most likely to influence capital flows. The link between
these areas of the business environment and capital flows seems intuitive. In terms of
financing, for example, it is unlikely that private capital will be attracted to countries with
poor financial regulation and unsound banks. In terms of market opportunities, solid GDP
growth indicates the potential for attractive returns on capital in a given country. And in
terms of the foreign trade and exchange regime, funds are attracted to markets where the
movement of capital is free and trade protection is at a minimum.
4.5. THE POTENTIAL EFFECT OF ENHANCED CAPITAL FLOWS ON ECONOMIC
GROTHWITHIN COUNTIRES
Enhanced inflows of capital are normally expected to raise the pace of growth of an economy
by increasing the availability of capital, which together with land and labour is one of the three
classic factors of production, and often the scarcest. Capital inflows may also support economic
growth in less obvious ways. Direct investment may not only allow the recipient country to
make fuller use of its natural and human resources, but may also result in opportunities for the
development of the domestic management and technical skills base, and for the acquisition of
technology. Export-oriented foreign investment may allow an economy to gain entry points
into new foreign markets. In highly-integrated industries like automotives, for example,
manufacturers investing in a country effectively bring their global markets along with them.
Official and private lending can provide borrowing countries not only with a larger pool of
capital but also with longer-term financing options than are currently available, making it
possible to finance long-term investments, including infrastructure investments improving
economic competitiveness, the investment climate and overall quality of life. Efforts to meet
the demands of foreign investors and financiers for legal protection and efficient, transparent
business environments can further stimulate investment by domestic individuals and
enterprises raising economic efficiency. Similarly, the presence of foreign portfolio investors
can play a large part in the development and deepening of domestic capital markets.
For the reasons above, increasing capital inflows can support economic growth, even in
countries without capital shortages, such as Saudi Arabia, the UAE, Kuwait, Qatar, Kazakhstan
and several other oil-producing COMCEC Member States. These countries can also benefit
enormously from capital outflows as they diversify their holdings and achieve higher returns
than would be possible confined only to their domestic markets. This provides a clear
opportunity for closer linkages between capital rich and capital importing nations within the
network of the COMCEC Member States.
More widely, capital inflows are driven by the profit motive and necessarily lead to future
outflows of principal and interest or of dividends and repatriated capital. In addition, their