How Important is Sound Domestic Macroeconomics in Attracting Capital Inflows to Developing Countries?

Developing countries tend to run current account balance of payments deficits on their trade in goods and services. Decumulating international reserves as a means of financing such deficits is not a long-term option, and may not even be a short-term option where reserves are already meagre. Inflows of capital in the form of either foreign aid or private capital offer a potential alternative. Failing to attract capital inflows implies that national income and domestic living standards will have to decline. An imbalance where domestic saving falls short of domestic investment either calls for foreign financing or for corrective domestic action which reduces consumption or investment. Given the related adjustment costs, developing countries will be anxious to make themselves attractive to foreign creditors. But how can they do this?