Sunday 16th October, 2005


Capital flows where rewards are greater

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One of my respected readers, whose experience in the global money game is phenomenal, responded to last week’s column saying that what I neglected to touch upon was the aspect of leadership in the context of structuring an economy and a country, because that structuring can kill hope and douse the flames of deep inspiration and motivation.

He continued by adding: “That appears to be what is happening in T&T. I am intrinsically motivated, but at some point, I want to see some fruits and based on my desire and capabilities, get some more.”

This reader is no Oliver Twist, asking for more, but a brilliant mind, who shifts today’s column to a whole new level. Today we will talk about capital flight.

Capital flight is the tendency for financial capital as well as human capital, of the finest quality, to take flight away from a developing country, in search of greater/higher rates of return, more equitable intrinsic rewards, and higher standards of living.

This is what happens when money accumulated through savings and deep motivation is invested elsewhere, because of a lack of adequate opportunity here.

It also encompasses the flight of quality human resources, when the environment is stagnant and/or corrupt. One of our local, capital market experts refers to this is phenomena as “a flight of quality.”

You see, the globalisation model is fed by capital mobility. In fact, free and open financial market mobility, and the free trade agenda, imply just that. Capital will flow in the direction of highest reward.

The reciprocal is also true, capital investments can flow into the local economy, can be large, create employment, stimulate investment, and lead to a value increase in local currency.

There is one significant experience of note in the free movement of financial capital. It developed in Asia in the years preceding 1997, and manifested in what was referred to as a capital market “overshoot.”

The inflows had spurred employment and returns that resulted in over investment. Then there was a rapid liquidation of assets, by foreign investors, and stock markets crashed. The Korean won, the Thai baht, and the Indonesian rupiah, lost value rapidly, and major recession hit.

Which brings us to the question of structuring the economy.

The failure in the Asian crisis was a lack of monitoring, and controls, which is in essence a failure of astute leadership, that closely impacts upon financial /monetary affairs.

One of the recommendations in business literature is that developing countries isolate themselves from international capital flows.

This has not been adopted by any country; in fact, it is not something that can be implemented since the typical leadership in developing countries are so dependant on international lending agencies.

What is now known as the Washington Consensus dictates that loan dependant states:

1) Implement tax reform to broaden the base, and lower the rates;

2) Endorse a free trade policy for reduced tariffs;

3) Remain open to foreign investment;

4) Prioritise public expenditure in health and education; and

5) Allow the currency to float freely.

Since all these measures are somehow meticulously demonstrated in our recent budget, what can we expect about the future value of our dollar, and our ability to form capital?

It seems my reader is right, we are pushed or pulled by what our leadership dictates, and that brings us back to those nagging thoughts about attribution, feelings of inequity, and expectancy.

One thing is for sure, we are all deeply loyal and committed to building our country, but true quality just doesn’t breathe in crap!

©2004-2005 Trinidad Publishing Company Limited

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