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| Kathmandu, Saturday January 04, 2003 Paush 20, 2059. |
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Imbalance capital flow and repercussions
By CHANDRA THAPA
The International Monetary Fund has warned
that the dipping figures of indices in the global financial market may further undermine
the pace of economic growth. Although some of the present figures (mostly mixed)
illustrate that there is a silver lining, pertaining to the prospect of global economic
growth but its magnitude to a very significant extent depends on the flow of capital. The
free flow of capital investment is an outcome of the events in the social and political
development, which the world leaders have to offer the world. The sharp decline of 39.1
percent in the Wall Street’s Standard and poor index since its peak performance of
March 2000 is a kind of warning that if the financial markets do not reflect sign of
capital flow in an efficient and desired approach, the probability to amplify investment
is a far remote question. The decline in investment further imposes a big hurdle on the
outlook of desired economic growth. Consequently, it is needless to say that maintaining
the pliability in the financial market of Europe, Asia and the US is also one of key
factors deciding the fate of global economic recovery. A study has shown that the
imbalance flow of capital or the skewed concentration of capital has its toll on the US
economy.
The performance at the Wall Street is not
only one of the economic barometers of the US economy but to a very material extent
reflects the global mood as well. The products traded represent the eager merchandising of
saving and investment. The big color-assorted screen with obscure data not only gives an
indication of securities being traded but also the buoyancy observed in the gap between
saving and investment. The biggest and the most haunting query disturbing any economic
pundits and financial expert is: Was the flow of capital balanced enough to pull back the
economy and what the future holds in this respect? Since the US market represents the
global scenario, let’s scrutinize some of the facts and figures of the Wall Street
which magnifies the verity that the economic recovery may not be sustainable prospect
unless and until the balance is maintained and the external environment is made prudent
enough.
For three decades, the Wall Street has been a
medium for domestic (USA) and global investors/savers to unleash their financial desire.
Investors (individual and institutional) have availed the opportunity to save and invest
in a wide range of spectacular product assortment ranging from traditional mutual funds to
emergence of market bonds. The non-stop clamour in the market reflected that the flow of
money, from those who held it, into the hands of those who employ it was intermediated in
an effective and efficient manner. This is the kind of mechanism (indeed a sophisticated
one) which further generates business, employment and income level (process leading to
economic recovery and boom). Such fluidity was at its peak in the 1990s in the US, parts
of Europe and in some of the Asian nations as well and this phenomenon became a booster,
what we call today "the big escalation in world GDP during the 1990s". It was
the period when the flow of capital was at its full swing and, of course, the external
environment was conducive enough to drive the engine of growth. However, the fact that was
completely ignored or deliberately not mentioned was that the enormity of flow
concentrated more than what was required (as it is felt today) in the telecommunications
sector, dot-com business and also (some argue) in the third world countries. The result is
clear: The downturn in the tech stock price, crash of telecom corporates like the WorldCom
and Global Crossing and emergence of bad credits. Hence, the aggressive flow of capital
has its toll not only on the US economy but equally on the global economy.
Who will invest now? This question
authenticates and scares us with the fact that we are in the era of cautious capital, but
again how long the economy can hold the burden of cautiousness and consequently, extremely
low capital flow? Just as the injection of free flow of capital lead to the economic boom
of the 1990s, the carefulness observed might have a very detrimental effect in the future
growth of world economy. This drastic upturn had its own dreadful repercussions with huge
losses by the companies, soaring unemployment rate, and future could see more
catastrophes.
The year 2002 was a bad year as far as US
stock market’s capitalization value (the value at which shares are traded in the
market) is concerned. The market plummeted by almost 50 percent compared to the figure of
more than US$ 17 trillion value in the year 2000. Most of the companies sustained by the
boom phase traded at record low of 80 percent and more. To name a few—Lucent, Yahoo,
Cisco and AOL Time Warner. Such downturn obviously leads to huge losses, and the end of
September saw nearly US$ 900 billion bank loans and bonds becoming bad, almost triple the
amount of 1999. Such huge fatalities have also undermined the psychology of investors,
triggering retreat from the market. Another fact which signifies the pathetic plight is
the drastic downturn, almost 80 percent (from US$ 108 billion in 2000 to US$ 20 billion in
2002), in the flow of venture capital (private money for companies to start up). In Nepal
we call it funds contributed by promoters.
What is the effect of such global volatility in our
relatively mini-micro economy? The aftermath of September 11 witnessed closure of almost
150 poultry farms in Nepal, dismantling hundreds out of their business. The tourism
industry has hit a record low, soaring unemployment rate, as tourists cancelled their
trips all over the world. This clearly shows that our economy is not vulnerable at all
when we compare the effect of global turmoil on our respective sectors. In our case also,
has anyone dare to figure out the concentration of capital flow (although meagre one).
Which sector has the maximum hold of capital ? The obvious answer is banks and other
financial institutions because there is no other option available. But fortunately, till
date, the banks and the concerned institution are doing good. The question is: For how
long? The options of pouring the liquidity of banks are also slowing down and the old
credits are becoming bad. Can we handle any more tolls on the economy? Not at all because
we are not a rich country like USA.
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