Vol. 2, Issue 5 (2015)
International capital flows and GDP growth
Author(s): Leena Sharma
Abstract: Globalization has several outcomes both favorable and unfavorable. It has widened the scope for economic activity, but at the same time also widened the potential exposure to instability. The same international links that increased welfare and efficiency in recent decades served as a powerful propagation channel for financial and economic shocks during the 2007â€“09 crises. But the impacts were far and wide. In the early stages of, rapidly falling asset prices put havoc on the balance sheets of international investors; in the later stages, a collapse in world trade punished many export-oriented economies. A different aspect is that gross financial inflows and outflows are substantially larger than the net flows associated with the current account. These are often large even where current account balances are almost negligible. This causes risk in the adjustment to global macroeconomic and financial stability eventually a stage will be reached when deficit nations will find it difficult to continue to spend more than they take in. Also surplus countries will find that their persistent surpluses dent the prospects of future growth. The imbalances will become unsustainable Thus the cherished stability will be in the dis-equilibrium state of the economy. The fluctuations will be severe, unmanageable and will always require state intervention. In this paper six nations Brazil, USA, China, Australia, South Africa and India have been chosen to estimate relationship between capital flows and GDP growth rate. The conclusions can not be generalized because different countries have different facets of capital flows which are statistically significant. Thus the role of FDI should be taken with a pinch of salt.