The Management of Capital Flows: Domestic Policy and International Cooperation

Capital flows into developing countries have exhibited a substantial increase since 1990. The change is especially dramatic in Latin America, where flows have more than doubled. However, capital flows have also been substantial in Asia where, as in Latin America, the change in those flows has represented about 3 per cent of GDP. This phenomenon has roots in both domestic and external factors. Statistical analysis for Latin America suggests that the weight of these factors is about the same. Therefore, in addition to good domestic policies, external factors are likely to play an important role in future developments. In this connection, the paper singles out two factors that may contribute to a gradual drying up of capital flows towards developing countries: (a) a worsening of the current account (of the balance of payments) in the industrialized countries (implying an improvement in the developing countries), and (b) a tendency on the part of developing countries to channel capital inflows more towards a current account deficit, and less towards the accumulation of international reserves. The combination of these two factors implies (recalling that, abstracting from errors and omissions, capital inflows = current account deficit + reserves accumulation) lower capital inflows into developing countries.