Capital flows to South Asian and ASEAN countries : trends, determinants, and policy implications

The authors compare the experiences of selected Asian countries in attracting different forms of external financing and examine how that financing has contributed to growth. They carry out the analysis for two subgroups - South Asian and ASEAN countries - with distinctly different dominant forms of capital flows. After reviewing recent trends in financial flows to individual countries, they perform a statistical analysis of the effects of foreign capital flows on the macroeconomic performance of developing countries in the region. They find that foreign direct investment has been a more significant positive factor than other types of resource flows in shaping the economic growth of ASEAN countries. Substantial increases in ODA flows are unlikely, and so is the resumption of significant bank lending, so policy makers in South Asia should pursue policies and nondistortionary incentive systems conducive to the infusion of foreign direct investment flows. The main findings are consistent with the Bank's emphasis on an increasingly important role for the private sector - and direct investment flows - in development. A focus on foreign direct investment is appropriate, given current constraints on external financing, particularly through traditional bank credits.