Santa Clara University



Following the Money :
Why Asian Capital Is Moving to Wealthier Nations

Helen Popper
Associate Professor of Economics

Ever since the Asian financial crisis of 1997, investment rates have remained lower in many East Asian countries in spite of the fact that many of the nations have high savings rates and available funds. Instead, much of that savings has been invested abroad, particularly in the United States.

A popular (at least in some sectors) explanation for this is that the economic imperatives of developed industrial nations are adversely affecting capital investment in Southeast Asia. German Chancellor Angela Merkel alluded to this in discussions of the global economic imbalances and the responsibilities of the United States during the G-8 summit last year.

“The idea that U.S. borrowing is sucking funds out of the emerging economies has been a centerpiece of such discussions,” notes Helen Popper, Santa Clara University associate professor of economics. “But in looking into this we’ve found that – despite its heavy borrowing – the role of the United States has been limited. U.S. macroeconomic conditions seem to play little or no role in shaping the behavior of any of the major categories of private capital flows.”

In a paper titled “Capital Flows, Capitalization, and Openness in East Asian Emerging Economies,” Popper and her co-author, Alex Mandilaras of the University of Surrey, UK, reach a different conclusion.

Rather than being shaped by the more developed industrial nations, investment patterns in these emerging economies seem to be affected more by the relative openness and accessibility of their own markets, Popper and Mandilaras found.

On the surface, it would seem that Asian money should be flowing into Asian countries where it could earn a higher return. According to the International Monetary Fund, the return to capital for the decade between 1994-2003 was 15 percent in emerging Asia, as opposed to 8 percent in Europe and 10 percent in the United States.

Since capital would be expected to flow to the area of highest return, this has been a long-standing puzzle, but Popper found that while U.S. conditions played a part in determining overall economic activity in the region, the larger role for capital flows was played by the inefficiency of the financial markets in the nations themselves. In essence, the Asian nations are importing financial services from more developed nations.

“When emerging economies lack sufficient financial infrastructure to match borrowers and lenders efficiently in their own countries, savers in those countries send their assets abroad, despite high domestic returns to capital,” she concludes. The good news for the Asian countries is that as their financial markets mature, they can expect to retain more of the native capital.

Economists elsewhere have done theoretical work speculating that internal financial infrastructure may be at the root of the Asian financial situation. What Popper and Mandilaras have done is compile and analyze a broad range of data to determine whether that approach holds water empirically.

After crunching the numbers, they found that what matters most in the investment patterns of these nations is their internal situation. “What I think is interesting,” Popper says, “is that this is not a story about the United States. It’s about the lack of access and fully functioning financial infrastructure within the region itself.”

Learn More

Helen Popper Profile

Official Exchange Rate Arrangements and Real Exchange Rate Behavior
Journal of Money, Credit, and Banking
Vol. 33, No. 4, pp. 976-993
January 2007
SSRN Abstract # 927811

Foreign Exchange Exposure and Exchange Rate Arrangements in East Asia
HKIMR Working Paper No. 17/2002
October 2002
SSRN Abstract # 1009439

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