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Regulatory Choices for Low Income Countries

Regulatory Choices for Low Income Countries

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Regulatory Choices for Low Income Countries

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  1. Regulatory Choices for Low Income Countries Layna Mosley Dept. of Political Science UNC Chapel Hill mosley@unc.edu

  2. 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.

  3. 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)

  4. Legal Capital Account Liberalization Based on Chinn and Ito scores

  5. Legal Capital Account Liberalization

  6. Actual Capital Account Openness Data from Lane & Milesi-Ferretti (2006)

  7. Actual Capital Account Openness Data from Beck et al (2000)

  8. 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

  9. 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.

  10. Regulatory Issues in Africa

  11. 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).

  12. 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

  13. 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.

  14. 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?

  15. Participation in IMF-Sponsored Data Standards

  16. ROSC Assessments, African Nations