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Regulatory Choices for Low Income Countries. Layna Mosley Dept. of Political Science UNC Chapel Hill Introduction. Recent trend: increased private capital flows to Africa Policy question: How can low-income nations best take advantage of private capital flows?

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Regulatory Choices for Low Income Countries

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Regulatory Choices for Low Income Countries

Layna Mosley

Dept. of Political Science

UNC Chapel Hill


  • Recent trend: increased private capital flows to Africa

  • Policy question: How can low-income nations best take advantage of private capital flows?

  • Concerns: benefits of capital account openness are contingent on macroeconomic stability and regulatory capacity.

  • Recommendation: gradual transition to capital account openness.

    • Sequence: regulation prior to liberalization

    • Requires increased technical capacity, as well as political will to regulate.

Private Capital Flows to Africa

  • High growth rates (>5% on average) in Africa in recent years

    • Strong growth predicted to continue.

  • Decline/leveling off in ODA flows (excluding debt relief) to African nations

  • Private investors attracted to high returns, growth foreceasts, diversification (uncorrelated with other markets),

  • Private capital flows

    • 2006: net private capital flows exceeded bilateral aid grants.

    • FDI increased by 44% in 2006 (extractive sector)

    • Increased foreign participation in local bond markets (i.e. Kenya, Nigeria, Zambia)

      • 17 nations now have sovereign credit ratings (local & foreign currency)

    • Development of local stock exchanges (albeit often small)

Legal Capital Account Liberalization

Based on Chinn and Ito scores

Legal Capital Account Liberalization

Actual Capital Account Openness

Data from Lane & Milesi-Ferretti (2006)

Actual Capital Account Openness

Data from Beck et al (2000)

How to benefit from openness?

  • A large literature on the effects of capital account openness on economic growth.

  • Mixed findings

    • Different sample countries, time periods, and measurements.

    • Variation across type of capital (FDI and equity flows vs. debt)

    • Importance of “pull factors,” sometimes generating contagion.

  • Central issue: contingent effects

    • Thresholds matter (i.e. Kose et al 2006)

    • Strong macroeconomic fundamentals » » growth (i.e. Edwards 2008)

    • Weakly regulated financial sectors lack capacity to absorb (and manage) inflows (i.e. Prasad et al 2007)

      • Central issue for this paper: regulatory challenges

Regulatory Issues in Africa

  • Background

    • International attention to standards and codes.

    • Issues of compliance (political will) and capacity

  • How do African countries, as a group, compare with other countries?

    • Standards example: SDDS (1 subscriber); vs. GDDS

    • Governance indicators (Kaufman et al 2007)

      • Regulatory quality, rule of law, control of corruption

      • Three groups:

        • EMBI-Global countries (excluding 6 African EMBI-G)

        • Eight African nations w/ increased participation in public debt markets (Botswana, Gabon, Ghana, Kenya, Nigeria, Tanzania, Uganda and Zambia)

        • All other African nations.

Regulatory Issues in Africa

Regulatory Issues in Africa


    • ~650 completed since 1999.

    • 15 percent have involved African nations

    • 28African nations; most frequent participants are Tunisia (13 ROSCs covering six areas), Uganda (10 ROSCs, 6 areas) and Mozambique (9 ROSCs, 5 areas).

    • Most frequently assessed areas (for Africa) are data dissemination and fiscal transparency, followed by banking supervision.

  • A subset of recent ROSCs is summarized in the paper

    • Six FSAPs (Uganda 2003, Tanzania 2003, Ghana 2003, Mozambique 2004, Madagascar 2006 and Namibia 2007).

    • ROSCs for Botswana (2007, data quality) and Kenya (2008, fiscal transparency).

Regulatory Issues in Africa

  • Lessons and patterns from these ROSCs:

    • Progress: banking system supervision (Tanzania); banking sector diversification (Madagascar); well-developed financial system (Namibia)

    • Many challenges, including

      • Banking sector development

      • Banking sector weaknesses

      • Capital market development

      • Debt management

      • Financial sector supervision and regulation

      • Legal system and corporate governance

      • National statistics and accounting systems


  • Improve data on the extent, maturity and composition of capital flows.

  • Maintain an awareness of volatility often associated with (short-term) capital flows.

    • Debt management offices

    • Rollover and currency risk.

    • How to attract longer-term investors?

  • Take sequencing seriously

    • Need for targeted, substantial technical assistance.

    • Avoid “one size fits all” prescriptions.


  • Time horizons

    • Some international codes and standards may be inappropriate for the least developed countries (i.e. Basel II).

    • Meeting international standards may mean foregoing the shorter-term benefits of capital account openness.

  • Policy issue: might capital account openness facilitate regulatory improvements?

    • Domestic politics: will the “losers” from openness use regulatory issues as a justification for continued closure?

Participation in IMF-Sponsored Data Standards

ROSC Assessments, African Nations

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