What factors appear to drive private capital flows to developing countries? and how does official lending respond?
AbstractThe authors study what drives private capital flows to developing countries, as well as the apparent response of official lending for the years 1978-97. Econometric results reveal that non-foreign direct investment portfolio flows to a country tended to rise in response to: 1) An increase in the current account deficit. 2) A rise in foreign direct investment flows. 3) Higher per capita income. 4) Growth performance. Once those variables were accounted for, private flows did not seem to be influenced by location, and regional factors. In addition, private capital flows (whether foreign direct investment or not) seem to respond positively (with a one-year lag) to World Bank lending commitments. By far the most important determinant of official lending to a developing country, seems to be the external current account balance, or a change in international reserves in the country. Official flows - including World Bank lending - appear to have played a stabilizing (or counter-cyclical) role in response to the volatility of private capital flows, and fluctuations in commodity prices, and GDP growth. (The stabilizing effect is weak, as official flows are only one-tenth of total long-term flows).
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Bibliographic InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 2392.
Date of creation: 31 Jul 2000
Date of revision:
International Terrorism&Counterterrorism; Banks&Banking Reform; Economic Adjustment and Lending; Economic Theory&Research; Financial Intermediation; Economic Theory&Research; Financial Intermediation; Banks&Banking Reform; Macroeconomic Management; Achieving Shared Growth;
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