Private capital flows

OECD Observer

Private capital flows to developing countries were about US$2.2 billion in 1962, about a third of official aid flows. By the 1980s they were generally larger than the aid flow, and they rocketed upwards in the 1990s, peaking around US$300 billion in 1997.

The most useful from the viewpoint of development was direct investment which was drawn particularly to Asia by the dynamism of its growth, and the availability of skilled labour at much lower wages than in the West.

By 1998, the total stock of foreign direct investment in the Rest was US$1.3 trillion, about US$248 per head of population. This investment supplemented domestic saving but was more important in transferring technology, skills and competitiveness of exports. However, such investment was much bigger within the West, where the stock was US$2.8 trillion in 1998, US$3,266 per head of population. A large part of the private financial flow was speculative and rose rapidly after payments restrictions were ended in Western Europe, Asia and Latin America in the 1990s.

The Asian and the Russian crises of 1997-1998 sparked off large reverse flows of short-term capital. The provisional IMF estimate for 2001 shows a net flow of US$160 million, a huge drop from the US$300 million peak of 1997. The volatility of these flows prompted Joseph Stiglitz (2002), former chief economist of the World Bank and Nobel laureate, to suggest that liberalisation of financial flows had gone too far, that IMF bailouts give excessive protection to foreign investors, and that borrowers in difficulty should have more scope for bankruptcy and debt default (as they had in the 1930s and earlier).

©OECD Observer No 235, December 2002




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