The new wave of private capital inflows : push or pull?
AbstractWidespread private capital inflows to middle-income countries have surged over the past three years. At the same time, Brady-type debt reduction operations and domestic policy reform took place, indicators of country creditworthiness improved dramatically, and international interest rates plummeted. Which factors most fully explain the wave of capital inflows? How sustainable is it? Some see this new wave of voluntary capital inflows as being mostly"pulled"by attractive domestic conditions, which open new and profitable investment opportunities in the domestic economy and improve country creditworthiness. Under this interpretation, if successful domestic policies are maintained, capital inflows will be sustained. Others see these inflows as being mostly"pushed"by conditions (especially low interest rates) in industrial countries. Under this interpretation, capital inflows would diminish and possibly turn to outflows if international real interest rates returned to the higher levels of the 1980s. The author presents an analytical model of international portfolio investment in developing countries based on non-arbitrage conditions between external returns and domestic returns adjusted by country risk. The author uses the model to explain why the new wave of private capital inflows is mostly a middle-income country phenomenon. To analyze the issue of private capital inflows, he applies the model of data for a representative panel of middle-income countries. The main empirical result is that (except in Argentina, the Republic of Korea, and notably, Mexico), the surge of capital inflows appears to be driven more by low returns in industrial countries than by domestic factors. So recent levels of capital inflows would be unsustainable if global interest rates returned soon to higher levels and cautious policies should be followed. Two other important conclusions are obtained. First, depressed returns in industrial countries caused the improved creditworthiness in indebted countries through their effects on discount rates. Country creditworthiness was an important transmission mechanism for external shocks and is the key to reconciling the push and pull interpretations of market data. Second, a soft landing appears feasible. Stock adjustment does not appear to be a significant component of the adjustment mechanism manifested in the surge of capital inflows. In other words, the evidence so far suggests that gradual increase in international interest rates would result in less capital inflow, or moderate capital outflows in some countries, rather than massive capital outflows that quickly bring down the stock of foreign liabilities. By and large, if there are capital outflows, they are unlikely to match past inflows unless the reversal in external conditions coincides with a worsening of domestic conditions.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 1312.
Date of creation: 30 Jun 1994
Date of revision:
Economic Theory&Research; International Terrorism&Counterterrorism; Macroeconomic Management; Environmental Economics&Policies; Banks&Banking Reform;
Other versions of this item:
- Fernandez-Arias, Eduardo, 1996. "The new wave of private capital inflows: Push or pull?," Journal of Development Economics, Elsevier, vol. 48(2), pages 389-418, March.
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1993.
"“Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors,"
7125, University Library of Munich, Germany.
- Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
- Claessens, Stijn & Diwan, Ishac & Fernandez-Arias, Eduardo, 1992. "Recent experience with commercial bank debt reduction," Policy Research Working Paper Series 995, The World Bank.
- Dooley, Michael & Fernandez-Arias, Eduardo & Kletzer, Kenneth, 1996.
"Is the Debt Crisis History? Recent Private Capital Inflows to Developing Countries,"
World Bank Economic Review,
World Bank Group, vol. 10(1), pages 27-50, January.
- Dooley, Michael & Fernandez-Arias, Eduardo & Kletzer, Kenneth & DEC, 1994. "Is the debt crisis history? Recent private capital inflows to developing countries," Policy Research Working Paper Series 1327, The World Bank.
- Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1992.
"Capital Inflows and Real Exchange Rate Appreciation in Latin America,"
13843, University Library of Munich, Germany.
- Leonardo Leiderman & Carmen Reinhart & Guillermo Calvo, 1992. "Capital Inflows and Real Exchange Rate Appreciation in Latin America," IMF Working Papers 92/62, International Monetary Fund.
- Demirguc-Kunt, Asli & Fernandez-Arias, Eduardo, 1992. "Burden-sharing among official and private creditors," Policy Research Working Paper Series 943, The World Bank.
- Michael P. Dooley & Mark R. Stone, 1992.
"Endogenous Creditor Seniority and External Debt Values,"
IMF Working Papers
92/57, International Monetary Fund.
- Michael Dooley & Mark R. Stone, 1993. "Endogenous Creditor Seniority and External Debt Values," IMF Staff Papers, Palgrave Macmillan, vol. 40(2), pages 395-413, June.
- Michael Dooley & Mark R. Stone, 1992. "Endogenous Creditor Seniority and External Debt Values," NBER Working Papers 4172, National Bureau of Economic Research, Inc.
- Cohen, Daniel & Portes, Richard, 1990. "The Price of LDC Debt," CEPR Discussion Papers 459, C.E.P.R. Discussion Papers.
- Jeremy Bulow & Kenneth Rogoff & Afonso S. Bevilaqua, 1992. "Official Creditor Seniority and Burden-Sharing in the Former Soviet Bloc," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(1), pages 195-234.
- Fernandez-Arias, Eduardo, 1991. "A dynamic bargaining model of sovereign debt," Policy Research Working Paper Series 778, The World Bank.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi).
If references are entirely missing, you can add them using this form.