Total Capital Flows Reach Record Levels, But Official Component Declines in Real Terms
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Capital flows to developing countries surged to over $250 billion in 1996 from about $100 billion in 1990 and, in real terms, private flows are estimated to be higher now than at their previous peak in 1981. A sharp increase in private capital flows to emerging markets in Asia and Latin America and reforming transition economies in Eastern Europe-largely in the form of foreign direct investment-accounts for most of the growth in overall capital flows to developing countries. In contrast, official development finance-two-thirds of which is bilateral official development assistance in the form of concessional loans and grants-dropped by nearly 17 percent in real terms between 1990 and 1996, to its lowest level since 1980.
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As pointed out by a staff team from the IMF's Policy Development and Review Department in Official Financing for Developing Countries, the recent decline in official development finance reflects fiscal consolidation and aid fatigue in many countries providing such resources, as well as competing demands from transition countries.
On a broader scale, the pattern of global capital flows reflects divergent economic trends that have emerged in the developing world, note the authors. The more developed countries have, for the most part, been able to integrate into global economic and financial markets, thereby gaining access to private capital markets. Other parts of the developing world have, however, made less progress in improving their policy environment and have yet to implement comprehensive reform strategies. Such countries, including many of the poorest countries in Africa, have little, if any, access to private flows and continue to rely on official sources of development finance.
This growing dependence has, however, been met with a weakening development assistance effort (see chart, this page), and there is little prospect of an early recovery in such flows. Furthermore, creditors have been providing development assistance more selectively based on countries' policy performance, poverty reduction, and social objectives. In 1996, for example, members of the OECD Development Assistance Committee adopted an ambitious strategy to focus their resources better on countries that undertake reform efforts. This strategy includes, for the first time, quantitative...
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