Money flows around the world like never before, but, asks Brian Caplen, is it promoting development?

The challenge of the next 10 years is financing job creation in Africa and other emerging markets still at the earliest stages of development. Their disadvantage as latecomers is that the tide has turned in thinking about deficits.

When Asian tigers such as Singapore and South Korea were coming of age up to the mid-1980s, current account deficits of 5% of gross domestic product were common. Investors recognised that to progress, young countries with few savings needed to import capital. Now an emerging market doing the same thing is likely to be the victim of volatility as capital leaves and the currency tumbles.

At the the annual meeting of the Institute of International Finance in Bali, Singapore’s deputy prime minister Tharman Shanmugaratnam discussed a new G20 report on improving the global financial system. “Is it good for a developing country to be running a current account surplus in order not to be vulnerable to the vicissitudes of global financial markets?” he asked. The report proposes measures so that the international financial system is once again one where “capital flows downhill” and is invested in the right areas.

In the new multi-polar world that has arisen with the advance of China and other key players, new solutions are needed. The report’s 22 proposals include having multilateral institutions help countries to deepen markets, improvement of risk surveillance and provision of a global financial safety net. They also include measures to bring in the private sector, such as new forms of international insurance and securitisation to encourage investment in developing country infrastructure. “There is tremendous untapped potential,” says Mr Tharman. “But we have got to take it and if we fail the consequences are not going to be merely economic.” With volatility currently hitting and hurting some emerging markets, a new approach is definitely needed.

Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen

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