{"text":[[{"start":7.35,"text":"The writer is a senior research fellow in the Global Economy and Finance Programme at Chatham House"}],[{"start":12.85,"text":"With the Iran war over, it’s possible to imagine considerable amounts of additional capital moving towards emerging economies. A chunk of this will arrive in the form of “hot money”: speculative, easily reversible flows into short-dated notes traded in developing countries’ capital markets."}],[{"start":29.200000000000003,"text":"While there’s certainly a role for speculative capital flows in the international financial system, their excesses are well known: the two decades of repeated financial crises that emerging economies suffered in the 1980s and 1990s, and the more recent “taper tantrum” of 2013, testify to the havoc that the resulting volatility can unleash."}],[{"start":51.5,"text":"The prospect of another boom-bust cycle of capital flows should raise the question: is there a better way to manage it all? Judicious use of capital controls might help."}],[{"start":62.3,"text":"The magnet drawing capital to emerging markets is strengthened by these countries’ improving creditworthiness. According to Standard and Poor’s, 2025 was the third year in a row with more sovereign rating upgrades than downgrades — a sustained rise unseen since the commodity boom years of the 2000s."}],[{"start":79.55,"text":"Underpinning this is the fact that signs of macroeconomic imbalance — vast current account deficits, say, or significantly overvalued currencies — are few and far between."}],[{"start":90.95,"text":"That’s partly the legacy of a decade or so of “US exceptionalism”, which constrained flows to developing countries as investors were happier chasing opportunities in the US. Smaller flows meant fewer opportunities for currencies to become overvalued or for current account deficits to grow to unhealthy levels."}],[{"start":109.05000000000001,"text":"Equally, the capital flow drought of recent years has pushed policymakers in emerging markets to be nimble and disciplined. Inflation has been broadly well managed, and while public debt stocks have been rising, they remain far lower than those in advanced economies. "}],[{"start":125.25000000000001,"text":"Optimists will argue that the effort emerging economies made in recent decades to accumulate foreign exchange reserves has given them the tools to protect themselves against the volatility of capital flows. Reserves allow policymakers to sell dollars when capital flees. That lowers the risk of a currency collapse or default when the capital flow cycle turns against them."}],[{"start":146.8,"text":"But the value of foreign exchange reserves as insurance depends on how their accumulation comes about. If the build-up of reserves is financed by short-term, easily reversed inflows into a government’s treasury bill market, for example, then not much self-insurance is being purchased. What goes in will simply spin out again on a dime."}],[{"start":168.15,"text":"Moreover, owning reserves can be expensive, since the interest rate they earn is generally lower than what governments pay on the domestic bonds they issue to counter the impact of reserves on the money supply. One can think of this “negative carry” as the cost of insurance against financial volatility — a cost that is especially high for gold, which has been gaining popularity as a reserve asset."}],[{"start":190.1,"text":"But policymakers should ask themselves whether it makes sense to pay a high price for insurance when alternatives exist. "}],[{"start":196.5,"text":"One feature of the next capital flows boom is that it will be the first since the IMF published its “institutional view” in 2012. This was the document in which the fund formally accepted that temporary, targeted measures to limit capital inflows might sometimes be useful in managing the cycle."}],[{"start":215.95,"text":"That marked the end of “capital account fundamentalism”, or the belief, promoted earlier by the IMF and the US Treasury, that global welfare would always be best served by the unrestricted cross-border mobility of money."}],[{"start":230.5,"text":"Emerging market policymakers wishing to limit the build-up of speculative, short-term liabilities have a range of options to consider. These include “unremunerated reserve requirements”, such as Chile’s “encaje” of the 1990s, where some fraction of an inflow has to be deposited interest-free for a while at the central bank; transaction taxes; minimum holding periods; caps or quotas on certain types of inflow; or restrictions on banks’ FX mismatches. "}],[{"start":258.75,"text":"Reserve accumulation probably does remain emerging economies’ single best way of protecting themselves against capital flows volatility. But fundamentalism can be a dangerous thing. Judicious restrictions on hot money — call it capital account eclecticism — should have a place in policymakers’ tool kits."}],[{"start":284.15,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1783415205_7570.mp3"}