Preface This book consists of two complementary parts: (1) an analysis of new trends in various categories of capital flows to emerging economies since the Asian crisis, their determinants and their international policy implications, and (2) an evaluation of national policies to reduce the volatility of capital flows and the negative impact of such volatility on domestic economies. The book aims to help fill the gap in knowledge on what determines lenders/investors' decisions to enter or withdraw from individual developing countries. It examines how the decision-making process has been modified in light of recent crises and by subsequent measures for a new financial architecture. It considers the policy implications for developing countries, especially in respect of macroeconomic and financial regulation policies, their interconnections, and volatile and reversible capital flows. Key conclusions are that the volatility of capital flows has constrained the ability of developing countries to implement countercyclical policies in times of both surge and drought. Since the Asian crisis the drought in private flows (which has already lasted five years), plus the high stock of existing debt, has severely constrained growth in developing countries; for example in Latin America there has been no per capita growth since 1998. This book explores policy options at the national and international levels to remedy this highly unsatisfactory situation. The book is the result of a UNU/WIDER project on 'Capital Flows to Emerging Markets since the Asian Crisis: How to Manage their Volatility', codirected by Ricardo Ffrench-Davis and Stephany Griffith-Jones. An initial workshop was held at the ECLAC headquarters in Santiago in March 2001. The workshop, whose purpose was to coordinate the participants' research projects, was inaugurated by José Antonio Ocampo, Executive Secretary of ECLAC. A final seminar took place at the WIDER Institute in Helsinki in October 2001, with the participation of the Director of WIDER and the Executive Secretary of ECLAC. We thank the contributors to this book and other participants for creative and fruitful discussions. We appreciate the stimulating environment provided by ECLAC and WIDER for the development of the project, the contributions made by several specialists at ECLAC, the financing provided by WIDER and the support of staff at ECLAC and WIDER in the organization of the workshop and the seminar. Ricardo Gottschalk and Jenny Kimmis (at IDS) and Heriberto Tapia (at ECLAC) provided very useful assistance and advice.Ricardo Ffrench-Davis Stephany Griffith-Jones Reviews: 'The project comprises of numerous other papers that researchers have contributed to this huge and far-impacting report, soon to be published as a book. It will provide an in-depth analysis of new trends in the supply of vehicles of capital flows and their determinants, as well as an evaluation of national policies to reduce volatility, which is basically a reflection of shortcomings in the countries' development process and the weakness of their mechanisms for regulating transactions that have opened the way for unusual financial crises in those systems.' - Roma Rana, United Nations Chronicle. 'If one ranks subjects by the ratio of their importance to human welfare over the extent of understanding of them among the educated public, the subject of capital mobility and capital controls must come near the top of the list. This book is a marvellously lucid and accessible set of essays from some of the leading experts in the field - who unlike many other contributors to the literature, do not assume that what is best for finance is best for the whole economy and society.' - Robert Hunter Wade, Professor of Political Economy, Development Studies Institute, London School of Economics. 'This book is outstanding in combining economic analysis with policy implications at the national and international level. It looks at capital flows to emerging markets from different perspectives and provides a comprehensive overview of problems, issues and possible solutions without getting lost in economic jargon. This seminal work must be read by anyone concerned about international development and the future of the world economy.' - Bernhard G. Gunter, EPIAM Project Director, New Rules for Global Finance Coalition, Washington DC 'This edition contains different contributions by well-known scholars on capital flows to emerging market economies. The book is a must read both for practitioners as well as academics interested in up to date analyses of the determinants and policy implications of capital flows to emerging markets since the Asian crisis.' - Robert Lensink, Professor in Finance and Financial Markets, Department of Finance, Faculty of Economics, University of Groningen. 'The period following the Asian crisis has not only witnessed a big decline in the size of capital flows to emerging markets, but also a great deal of volatility in those flows. Ffrench Davis, Griffith-Jones and collaborators have produced an extremely useful synthesis of developments that have contributed to the decline and volatility in capital flows, with thoughtful analysis and generous statistics to support it. The attempts to redesign the international financial architecture need to pay careful attention to reforms by suggesting changes that both borrowers and lenders need to make. This book is a timely attempt to seek to address this vital issue by suggesting reforms that could be made to make recipient countries less vulnerable to global financial instability.' - Abdur Chowdhury, Chief Economist and Director, Economic Analysis Division, United Nations Economic Commission for Europe, Geneva. Description: This book analyzes the new trends in capital flows to emerging markets since the Asian crisis, their determinants and policy implications. It explains why such flows have declined so dramatically in recent years, emphasising both structural and cyclical factors. Senior bankers, regulators, and well-known academics explain the behaviour of different players. The book breaks new ground by showing in detail how such behaviour has contributed to the decline of flows and their volatility. The book suggests what coping mechanisms developing countries could adopt to deal with crisis situations; what measures should be taken at the national and international levels to make recipient countries less vulnerable to international financial instability; how such instability can be reduced; and what can be done on the source countries to encourage larger more stable capital flows to developing countries. Author Biographies: RICARDO FFRENCH-DAVIS is Principal Regional Adviser of the UN Economic Commission for Latin America and the Caribbean (ECLAC), was Chief Economist of the Central Bank of Chile and Director of the Centre for Economic Research on Latin America (CIEPLAN). STEPHANY GRIFFITH-JONES is a Professorial Fellow at the Institute of Development Studies, Sussex University, specialising in International Finance. She has published widely in the field and has acted as advisor to numerous governments and international organisations.