The Capital Ecosystem’s Unfit Survival

The McKinsey Global Institute used its 180-country proprietary capital flow database to warn of an unhealthy “ecosystem” with the cross-border total down 60 percent the past five years as post-crisis correction overshoots. Financial assets went from $200 trillion to $225 trillion over the period, but have fallen 45 percent as a chunk of GDP with annual growth crawling at 2 percent. Emerging market depth at 150 percent is under half the advanced economies’ 400 percent as loan, stock and bond market development lags. The holding pattern may stifle business investment and homeownership. International allocation has fallen from its $12 trillion 2007 peak mainly due to Eurozone bank retrenchment, and within Europe the ECB and other public institutions now account for most of the activity. Under additional regulatory strictures commercial banks have shed $725 billion in assets chiefly from foreign operations. The 2012 estimate for inward developing world direct and portfolio investment was $1.5 trillion, while the outward sum was $1.8 trillion increasingly in “South-South” direction, according to the research arm. FDI was off 15 percent last year, but represented 40 percent of global capital commitments as a “stabilizing influence.” Current account imbalances which contributed to debt buildups have also improved, with previous deficits particularly pronounced in peripheral Europe and the US. Emerging economies can reset integration with corporate bond and small enterprise access pushes to meet trillions of dollars in equipment and infrastructure needs. Policymakers can restrain balkanization tendencies by completing the Basel III agenda, including for bank resolution and derivative clearing, while removing geographic restrictions for pension and insurance fund engagement. Low yields and growth for industrial countries will propel emerging financial market resort in the coming decade where trading is “shallow and illiquid” and can hurt both public and private equity strategies without greater attention to fostering “new models and skills,” the institute remarks.

A separate study by a group of business executives under the auspices of the Washington-based CSIS urges a private-sector based development approach to catalyze momentum, with financial and technical assistance going to promote entrepreneurship and trade. US government aid agencies would place economic growth at the mission core, and support corporate partnerships and bilateral and multilateral investment treaties. Financing mechanisms at AID and OPIC could be overhauled to serve these priorities, with the latter independent profit-making institution able to provide equity for its own account as with G-7 peers. An additional $350 million should be found through cost savings and efficiencies to aid commercial climate reform and small firm credit access, and low-income country targeted efforts like the African Growth and Opportunity Act could be expanded to other duty-free sectors, the panel believes. It backs capital increases for the official international lenders, as the Treasury formally submitted a $65 billion IMF quota request again to Congress from the 2011 G-20 agreement which has since barely evolved.