Barriers and Opportunities for Enhancing Capital Flows
In the COMCEC Member Countries
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impact on economic growth is thought to vary depending on the type of flows: FDI is often
considered more beneficial than portfolio equity, and portfolio equity more beneficial than
bond issuance and borrowing. This however is highly contingent on the needs of the country
and the areas of its competitive advantage. Within the context of FDI, greenfield investment in
export-oriented industries is typically considered more beneficial for spreading wider
economic development than acquisitions from the local public or private sector of existing,
domestic market-oriented productive assets, or of real estate. On the other hand, foreign
capital investments in primary industries using specific technologies and skills which have to
be imported, and employing relatively few native staff, have notoriously low multiplier effects
in the domestic economy, limiting their impact on broader economic development. Many of the
COMCEC Member Countries which permit foreign investment in oil and gas therefore aim for
compensation in the form not only of royalties and taxation but also through offset deals, as
well as making additional efforts to attract foreign investment in other sectors. It must be
noted that some offset agreements tend to have a tarnished reputation, however, due to
allegations of corruption or mismanagement.
Capital flows are also by nature irregular. They are easily affected by general international
liquidity tightening and depressed commodity prices (such as affected most COMCEC Member
Countries in 2009). The perception of bubbles and financial sector weakness (as in the Asian
crisis of 1997 or the Kazakhstan housing credit market a decade later), or of an excessive
current account deficit, can also affect the strength of capital flows, as can damaged investor
confidence (e.g.: in the countries currently undergoing political transitions, and their
neighbours). Strong capital inflows –and especially short-term flows of financial capital – tend
to cause a country’s currency to strengthen, asset prices to inflate and interest rates to decline.
When strong capital inflows weaken, a sharp and disruptive correction may ensue, and a boom
cycle can turn into a bust cycle. The difficulty of managing these cycles in an open economy
with a large current account deficit has caused Turkey, which attracts the highest capital
inflows of all COMCEC Countries, to pay more attention to increasing domestic savings.
Finally, the impact of capital inflows on growth appears to be greatest not simply in countries
with the lowest current GDP levels, but in countries with adequate social and human capital as
well as administrative, legal and financial institutions able to cope satisfactorily with such
capital movements. In the light of these considerations, no country can turn its back on the
potential benefits of capital inflows, but each country may wish to adopt a strategy and targets
that take account of its existing conditions, its capital needs, and the types of flows which it is
most likely to attract.