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“Interest Rates in the North and Capital Flows to the South: Is There a Missing Link?” by Barry Eichengreen and Ashoka Mody illustrate and show that there is a statistical correlation between capital flows into developing nations and the interest rates of developed countries like the U.S or Japan. As some of the financial lingo was quite difficult to follow at times, I was able to take away the idea that as interest rates in the U.S. rise, there is decreasing foriegn investment in developing countries. The effect of capital flows to developing countries is the opposite of this when the cost of borrowing in the U.S. falls. The biggest takeaway I have from this article is the idea that developing countries are in fact at the mercy of some of the world's financial leaders. We know that a capital is needed for initiating and sustaining growth in a developing growth. The problem arises because the capitol flow is dependent on exogenous interest rates, and thus the developing countries are susceptible to shock caused by increasing foreign borrowing rates. The question is then, what kind of policies and institutions can a developing nation put in place to absorb such shocks and maintain capital stocks and GDP. This is yet another example of a complex cyclical trap that some countries, like the Latin America nations, can fall into. Like many of the other problems we have discussed in this class, there is not a clear cut solution and it requires cooperation between private and public sector, both domestic and foreign.


I found this article to be quite thought provoking. Learning about development economics in general has given me a better understanding of how interconnected the global economy is. This article however took my understanding of the interconnected nature of our global markets to the next level.

It was very interesting to learn that a firm in a developing nation with almost no real connection the the developing world could be so affected by the economic winds in the developing world. At the same time it was somewhat troubling to think that a businesses success or failure could be so sway by the monteary policy of the developed world. In a way this seems like a remnant of colonialism in its own right. Many of these developing nation don't have direct ties to their colonizing nations that host many of the worlds "money centers" Nonetheless, the health of their economy and level of outside investment is still swayed by their former colonizers.

Aside from the connection of interest rates and capital flows to the south pointed out in the article, I found much of the rest of the article to be very confused. While some of the historical analysis of previous economic expansions and contractions during the 80's, 70's and, 20's made sense, I was almost entirely unable to understand the conclusion. After this reading, I am still confused about whether increases or decreases in interest rates cause more capital flows to the south. I look forward to discussing this more in class.

Nicholas Tierney Watson

While the evidence is not totally conclusive or aligned with the literature on the topic, it appears that interest rates and credit opportunities in industrialized countries have an important effect on emerging markets. I find something concerning about this finding. If highly industrialized “money center” countries definitely know that their money markets have direct and significant effects on emerging markets, these countries can abuse this. While Dependency Theory does not have a robust body of work, I think that this kind of leverage might fall into that category of research. If “money center” countries can control growth and capital flows in emerging markets, who is not to say that they will limit credit in these counties for financial or political reasons. What I find maybe more concerning is what Eichengreen and Mody write at the end of the paper, “tendency for relatively poor credit risks to drop out of the market in periods of relatively high U.S. rates”. Due to higher rates, and maybe suddenly higher rates, in the US, the people with the highest credit risk, aka incredibly poor people, fall out of the credit market. At the end of this, all are the interconnectivity of our financial markets a good thing? Is it ethical? Is it fair? How can we use this increased understanding of capital flows to help aid in sustainable development? Does the US have an obligation to change rates to help emerging markets grow, and credit spread?

Danh Nguyen

“Interest Rates in the North and Capital Flows to the South- Is there a Missing Link?” focuses on a piece of the big Development Economics puzzle that I care a lot about throughout the course of the term: extending foreign credits to developing countries. It has always been interesting to me how some developing countries have turned into some of the biggest economies in the world. Taken out of context, their regulations seem really internal; however, the paper expands on how foreign aid, foreign credits, and foreign relations play a very important part in their general development. The paper also talks about Latin American countries, which have been lagging behind after strictly implementing the Washington consensus as discussed in The Growth Strategies paper. This is a perfect example as to how deregulation and trade liberalization should be approached carefully as foreign credits, if not approached carefully, can keep an economy stuck in a vicious cycle of debt. The foreign credit system is getting more and more complicated these days as the biggest players keep expanding in influence, with China and the United States trying to one up each other causing fluctuations in the exchange rates of the currency. This in turn leads to the fluctuations of most economies in the world that are affiliated with these countries. Foreign credits incentivize businesses in developing countries, but is the incentive great enough for people to actually be willing to take the risks? The paper, though did not suggest any regulations, does provide insightful information on foreign credits and the increasing need to be prudent when approaching foreign credits. Some of the information went over my head due to the complexity of the analysis, and I will certainly dive deeper into the paper to figure some of the statistics out.

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