A FEW years ago, capital was flying around the globe faster than it ever had. The world economy became more tightly integrated and technology contributed to making it easier for banks and investors to deploy their money on the other side of the world if prospects looked more attractive there.
Then came the financial crisis, which, the McKinsey Global Institute noted in a report issued this week, “upended many of the world’s assumptions about the inevitability of growth and globalization.”
Last year, the report estimated, world capital flows were 13 percent below the levels of the previous year. And while they were higher than during the depths of the credit crisis, they are still 61 percent below the peak levels of 2007.
“Some of the shifts under way represent a healthy correction of the excesses of the bubble years,” the report stated, but there is a risk the reversal of globalization will be overdone.
“If we move to a system where the global financial system is more balkanized, that will raise the cost of capital for more borrowers and perhaps slow economic growth,” said Susan Lund, a principal of McKinsey Global Institute and the primary author of the report.
The accompanying charts show the institute’s estimates of global capital flows, which totaled $4.6 trillion in 2012, down from $11.8 trillion in 2007. Of the 2007 total, $10.2 trillion went to developed countries, and $1.6 trillion went to developing countries. Last year, capital flows were $3.1 trillion, a decline of 69 percent, for the developed countries, and $1.5 trillion, a decline of 10 percent, for the others.
The charts break out the flows into four types. The most stable is foreign direct investment, in which a company either builds a business or acquires at least 10 percent of an existing business. By far the least stable is loans, which are often short term and can be withdrawn on short notice, creating havoc. The others are bonds and equity, meaning stock market investments.
The Asian currency crisis of the late 1990s taught developing countries the potential hazards of loans that can be here today and gone tomorrow — a lesson that some European countries ignored to their regret. The institute calculated that in 2006 and 2007, the amount of capital flowing into Ireland was more than twice as large as the country’s gross domestic product. Moreover, most of that was in loans and bonds, debt instruments that in many cases could not be repaid.
International loans and bond issuances have particularly declined in Western Europe, where the euro crisis led many to withdraw funds and caused banks to concentrate on local markets. During four years in the middle of the last decade, more than $1 trillion in Western European bonds were purchased by foreigners each year. In each of the last two years, more bonds were sold back to the issuing country than were newly sold internationally.
For a number of years, China was the largest recipient of foreign direct investment, and that continues, with as estimated $260 billion flowing in last year. But it also sent $120 billion in such investment to other countries, about the same as Japan and more than was sent by any other country except the United States, according to the estimates.
Off the Charts: Globalization, as Measured by Investment, Takes a Step Backward
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Off the Charts: Globalization, as Measured by Investment, Takes a Step Backward
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Off the Charts: Globalization, as Measured by Investment, Takes a Step Backward
