DHL Global Connectedness Index 2014

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48 3. The Depth of Global Connectedness Figure 3.5 Total Gross Capital Flows as Percentage of GDP, 1980 – 2012 21 20% 15% 10% 5% 0% 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Global gross capital flows (equity and debt together) soared from single-digit percentages of world GDP to more than 20% before the crisis, and then came crashing down in 2008. increasing financial integration, measured based on the convergence of equity risk premia, has also been associated with less volatile growth. 22 International portfolio debt and bank loans, on the other hand, can be substantially more problematic. When host country conditions deteriorate, such highly volatile flows can reverse course and dash for the exits precisely when a country needs them most. Thus, “there is a systematic empirical link between exposure to short-term debt and the likelihood (and severity) of financial crises.” 23 While debt flows are excluded from the index, some contextual background on them is important because most of the “financial fragmentation” that has taken place since the collapse of Lehman Brothers has involved bank loans and other types of international lending. Figure 3.5 tracks total gross capital flows (loans, portfolio debt and equity, and FDI) 24 as a percentage of GDP from 1980 to 2012, revealing a dramatic run-up in international capital flows before the global financial crisis and their collapse in 2008. The As shown in Figure 3.6, the pre-crisis expansion of international capital flows was driven primarily by loans and portfolio investment (debt and equity) inflows into advanced economies. 25 Wholly 86% of the growth of total capital flows from 2003 to 2007 came from inflows into advanced economies, and FDI never contributed more than 20% of the inflows into advanced economies over that period. Much of this run-up, even extending farther back to 1980, was actually more reflective of European rather than global financial market integration. From 1980 to 2007, 56% of the global growth in capital flows and, since 2007, 72% of the 26 27 28 decline took place in Western Europe. collapse in cross-border bank lending increased the share of total capital flows accounted for by the equity flows that are covered on the DHL Global Connectedness Index. Figure 3.7 tracks the capital pillar depth components of the index, FDI and portfolio equity, since 2005. The distinction between these two types of equity capital is that FDI implies control over a foreign enterprise whereas portfolio equity does not. The typical threshold to distinguish between them is whether or not the investor’s holding exceeds 10% of the value of the foreign enterprise. However, as 10% is an arbitrary cut-off point, it is useful to think of the two as forming a continuum across the broader category of international equity investment. The depth of FDI stocks rose to a new record high level in 2013, in relation to the 100 years of historical data shown in Figure 3.8. The depth of international portfolio equity stocks also rose to the highest level observed during the nine-year period over which the DHL Global Connectedness Index has been calculated. International portfolio equity investment stocks soared from 25% of world stock market capitalization in 2005 to 39% in 2013. The expansion in the depth of FDI stocks was more modest, reaching 36% of GDP in 2013 as compared to a previous peak of 34% in 2007. Turning from stocks to flows, while both FDI and portfolio equity flows remain below their pre-crisis peaks, both did increase from 2012 to 2013, with portfolio equity extending strong gains from the previous year while FDI partially reversed a sharp decline. In 2013, FDI outflows amounted to 8% of global gross fixed capital formation, implying that roughly 8% of fixed capital investment during the year was deployed across international borders. Net portfolio equity outflows amounted to roughly 2% of global stock market
DHL Global Connectedness Index 2014 49 Figure 3.6 Gross Capital Inflows by Component, 2000 – 2011 27 Billions of US$ 12,000 10,000 34% 8,000 6,000 4,000 2,000 0 -34% -17% -5% -13% 46% 82% 52% 75% 26% 55% 17% 34% 76% -39% -87% -21% -9% 302% 87% -20% -18% -2,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Loans Emerging FDI Emerging Portfolio Emerging Loans Advanced FDI Advanced Portfolio Advanced The pre-crisis expansion of international capital flows was driven primarily by loans and portfolio investment (debt and equity) inflows into advanced economies, especially within Europe. Figure 3.7 Capital Pillar Depth Ratios, 2005 – 2013 (without 3-year averages) 28 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 FDI Outward Stocks (% of GDP) FDI Outflows (% of GFCF) Portfolio Equity Outward Stocks (% of Mkt Cap) Portfolio Equity Outflows (% of Mkt Cap) The depth of FDI and portfolio equity stocks rose to new peaks in relation to the period studied, while FDI and portfolio equity flows remained below their pre-crisis levels. capitalization. In 2012, they accounted for about 1% of the value of all stocks traded around the world. 29 The normalization using stocks traded is a superior measure of the depth of portfolio equity flows but is not used in the index itself due to reporting delays (data are currently available only for 2012, not 2013). Looking forward, the United Nations Conference on Trade and Development (UNCTAD) forecasts 11.5% growth in FDI flows in 2014, 8% in 2015, and 5.9% in 2016, implying that the depth of FDI flows and stocks will continue to rise over the forecast period. Of the policy changes impacting FDI during 2013 that were tracked by UNCTAD, 73% involved opening up or liberalizing regulation of FDI. The share of liberalizing measures, however, has been on a declining trend since 2001, when 95% of such regulatory changes were favorable for FDI. 30 Similar projections and analyses of the regulatory environment for portfolio equity investment are not available. Information Pillar Depth The depth of international information flows has been on a continuous rising trend since it was first measured in 2005, powered by strong increases in the depth of international internet bandwidth and international telephone calls. Figure 3.9 tracks the evolution of the information pillar depth components since 2005. 31 International internet bandwidth per internet user has soared from 6,200 bits per second in 2005 to 52,600 in 2013 (8.5 times its 2005 level). International internet bandwidth per internet user, however, measures the potential for
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286 Appendix B - Data Sources, Regr
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288 Appendix B - Data Sources, Regr
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Praise for the DHL Global Connected
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DHL Global Connectedness Index 2014

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