Question 1: Do you think a country the size of Iceland—a Lilliputian—is more or less

sensitive to the potential impacts of global capital movements?

Smaller countries – as measured by population and economic output – are clearly more sensitive
to global capital movements. The sensitivity of a country like Iceland is amplified because of
relative size. Capital commitments that are regarded as relatively small by investment banks,
global corporations, or money managers in bigger markets like New York and London, can end
up literally drowning a smaller open market in a very short time. A country like Iceland (GDP as
0.1% of U.S. GDP) are actually hyper-sensitive to such threat. As the global financial markets
become more integrated and developed, capital flow in and out of a country can fluctuate hugely
in a short time. While these changes are relatively small in bigger countries compared to their
GDP, and short-term fluctuations can be covered by their reserves, they account for a much
significant part in smaller countries GDP, distort BOP and are unable to be bailed out by these
governments’ reserves.

Moreover, the global markets see them as comparatively stable and low-risk country markets,
making them even more attractive as potential recipients of short-term capital investments. Thus,
as the size of short-term capital flows increase, so do its impacts on the country economy.

Reference:

Eiteman, D. K., Stonehill, A. I., & Moffett, M. H. (2019). Multinational business finance. New
York, NY: Pearson.