Capital Flow Distortions Caused by Repressed Financial Markets

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Ohio State University. Department of Agricultural, Environmental, and Development Economics

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The present paper discusses the main features of repressed financial markets and the various subtle ways that repressed financial markets cause major distortions of capital flows among countries. Some of the key features of repressed financial markets include large fiscal deficits, high inflation, subsidized and directed credit lines, low savings rates, high bank reserve requirements, high transaction costs, and government controls of interest rates and exchange rates. Repressed financial markets may increase risk for agribusinesses by adversely affecting ownership opportunities and the ability to invest locally. The added risks also include exchange rate risk and interest rate risk. Agribusinesses may want to increase use of futures markets, contracting and integration to manage the increased risk. As the world moves to more open markets, countries with repression in financial markets may encounter difficulty attracting foreign investment and mobilizing local resources for economic growth. Reform of financial markets will likely be necessary to succeed in the new world order.