Global capital flows are increasingly "herdlike" and volatile, making it harder for emerging economies to lock down capital, the International Monetary Fund said Saturday.
Chair of IMF's steering committee, International Monetary and Financial Committee, Tharman Shanmugaratnam, at a press conference in Washington, DC, on April 11, 2014
The increased global power of bond funds, mutual funds and exchange traded funds, often underpinned by the savings of small investors, has made capital flows more fickle and risk-sensitive.
That means countries on the receiving end have to work harder to hold onto capital, said Tharman Shanmugaratnam, chair of the IMF's steering committee, the International Monetary and Financial Committee.
Speaking at the end of the spring meeting of Fund members, Tharman said they singled out increased volatility in capital movements as one of the key challenges for the global economy.
"That's not going tobe a short term phenomenon, that's going to be a continuing challenge," he said.
"It's partly reflecting a change in the structure of global finance -- more capital flows, and also a changed composition, with a greater share that's been taken up by bond funds, a greater share that's been taken up by mutual funds, ETFs."
That composition often also represents the interests of retail investors who Tharman said "tend to be a little more jittery."
What we have observed is more herdlike behavior in the markets, more herdlike behavior driving capital flows."
This translates to more frequent, more sudden reactions to changes in risk perception.
Tharman said that emerging economies, which have suffered sharp outflows of foreign capital over the past year, as well as advanced economies must protect themselves by implementing structural reforms that will assure investors and help generate jobs over the long term.
Reforms include balance sheet repairing, banking systems, including in Europe, as well as "improving the functioning of labor markets so as to reduce the extraordinarily high levels of youth unemployment in many parts of the world," he said.