Regulatory Choices for Low Income Countries Layna Mosley Dept. of Political Science UNC Chapel Hill firstname.lastname@example.org
Introduction • Recent trend: increased private capital flows to Africa • Policy question: How can low-income nations best take advantage of private capital flows? • Concerns: benefits of capital account openness are contingent on macroeconomic stability and regulatory capacity. • Recommendation: gradual transition to capital account openness. • Sequence: regulation prior to liberalization • Requires increased technical capacity, as well as political will to regulate.
Private Capital Flows to Africa • High growth rates (>5% on average) in Africa in recent years • Strong growth predicted to continue. • Decline/leveling off in ODA flows (excluding debt relief) to African nations • Private investors attracted to high returns, growth foreceasts, diversification (uncorrelated with other markets), • Private capital flows • 2006: net private capital flows exceeded bilateral aid grants. • FDI increased by 44% in 2006 (extractive sector) • Increased foreign participation in local bond markets (i.e. Kenya, Nigeria, Zambia) • 17 nations now have sovereign credit ratings (local & foreign currency) • Development of local stock exchanges (albeit often small)
Legal Capital Account Liberalization Based on Chinn and Ito scores
Actual Capital Account Openness Data from Lane & Milesi-Ferretti (2006)
Actual Capital Account Openness Data from Beck et al (2000)
How to benefit from openness? • A large literature on the effects of capital account openness on economic growth. • Mixed findings • Different sample countries, time periods, and measurements. • Variation across type of capital (FDI and equity flows vs. debt) • Importance of “pull factors,” sometimes generating contagion. • Central issue: contingent effects • Thresholds matter (i.e. Kose et al 2006) • Strong macroeconomic fundamentals » » growth (i.e. Edwards 2008) • Weakly regulated financial sectors lack capacity to absorb (and manage) inflows (i.e. Prasad et al 2007) • Central issue for this paper: regulatory challenges
Regulatory Issues in Africa • Background • International attention to standards and codes. • Issues of compliance (political will) and capacity • How do African countries, as a group, compare with other countries? • Standards example: SDDS (1 subscriber); vs. GDDS • Governance indicators (Kaufman et al 2007) • Regulatory quality, rule of law, control of corruption • Three groups: • EMBI-Global countries (excluding 6 African EMBI-G) • Eight African nations w/ increased participation in public debt markets (Botswana, Gabon, Ghana, Kenya, Nigeria, Tanzania, Uganda and Zambia) • All other African nations.
Regulatory Issues in Africa • ROSCs/FSAPs • ~650 completed since 1999. • 15 percent have involved African nations • 28African nations; most frequent participants are Tunisia (13 ROSCs covering six areas), Uganda (10 ROSCs, 6 areas) and Mozambique (9 ROSCs, 5 areas). • Most frequently assessed areas (for Africa) are data dissemination and fiscal transparency, followed by banking supervision. • A subset of recent ROSCs is summarized in the paper • Six FSAPs (Uganda 2003, Tanzania 2003, Ghana 2003, Mozambique 2004, Madagascar 2006 and Namibia 2007). • ROSCs for Botswana (2007, data quality) and Kenya (2008, fiscal transparency).
Regulatory Issues in Africa • Lessons and patterns from these ROSCs: • Progress: banking system supervision (Tanzania); banking sector diversification (Madagascar); well-developed financial system (Namibia) • Many challenges, including • Banking sector development • Banking sector weaknesses • Capital market development • Debt management • Financial sector supervision and regulation • Legal system and corporate governance • National statistics and accounting systems
Conclusions • Improve data on the extent, maturity and composition of capital flows. • Maintain an awareness of volatility often associated with (short-term) capital flows. • Debt management offices • Rollover and currency risk. • How to attract longer-term investors? • Take sequencing seriously • Need for targeted, substantial technical assistance. • Avoid “one size fits all” prescriptions.
Conclusions • Time horizons • Some international codes and standards may be inappropriate for the least developed countries (i.e. Basel II). • Meeting international standards may mean foregoing the shorter-term benefits of capital account openness. • Policy issue: might capital account openness facilitate regulatory improvements? • Domestic politics: will the “losers” from openness use regulatory issues as a justification for continued closure?