Financial Flows to Developing Countries: Trends, Problems and Future Outlook

Capital flows from countries with a relatively rich capital endowment (essentially the developed countries) to countries with relative capital scarcity (primarily the developing world) should be a regular feature of a soundly performing world economy. Such international resource flows would make for a higher rate of world economic growth, would contribute to a more balanced development of the world economy and, if such a thing can be said to exist, represent a move towards the optimum under the global welfare function. Moreover, financial flows of this nature which bring about a better worldwide distribution of scarce capital resources should not be interpreted as the financing of current-account imbalances; on the contrary, as already fully appreciated in the classical model of the world economy, it is these capital flows which, largely through their exchange rate effects, will bring about that pattern of current-account imbalances which is necessary to transfer the capital in real terms. And, finally, while individual credits will have to be serviced and repaid, there is no need for a reversal in the foreseeable future of the flows in aggregate terms; on the contrary, these one-directional net capital flows should persist as long as there are major differences in international capital endowment.