Chapter 8: Managing Capital Inflows: Eastern Europe in an Asian Mirror
8. Managing capital inﬂows: Eastern Europe in an Asian mirror Barry Eichengreen and Omar Choudhry 8.1 INTRODUCTION The accession economies of Eastern Europe and the rapidly industrializing economies of East Asia are facing similar problems of managing capital inﬂows.1 Both regions are attractive destinations for foreign investment by virtue of their relatively low labour costs – which makes them competitive export platforms – and their rapidly growing domestic markets. The magnitude of ﬁnancial ﬂows to the two regions is fairly similar: the Institute of International Finance forecasts for 2005 were for private ﬁnancial ﬂows of $122 billion to Emerging Europe and $134 billion to Emerging Asia.2 Both regions maintain relatively stable exchange rates against their principal trading partners: Eastern Europe vis-à-vis the EU-15 and East Asia vis-à-vis the United States.3 Both have capital market regimes that are substantially open to ﬁnancial ﬂows. At the same time, outcomes in the two regions are visibly diﬀerent. In Emerging Europe savings are insuﬃcient to underwrite domestic investment; in most years the investment–savings gap translates into a current account deﬁcit that is ﬁnanced by capital inﬂows. (This was the case in 2003 and was again forecast to be the case in 2005, although Emerging Europe’s current account was actually in modest surplus in 2004.) In Emerging Asia, in contrast, savings more than suﬃce to ﬁnance the region’s investment. The result is a current account surplus, requiring private capital inﬂows to be more than absorbed into...
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