Private capital flows to low income countries: dealing with boom and bust
Private capital flows to low income countries: dealing with boom and bust. London, Development Finance International- Debt Relief International Ltd., FPC CBP Series No 2, November 2009 90p.
Authors Matthew Martin and Nils Bhinda will present this newly published study which traces the impact of foreign private capital flows on LICs in Africa and Latin America. It shows why, if the countries' own analyses had been widely heard, the international community would have responded faster and reduced the damage caused by the crisis.
The analysis in Chapters 1 and 2 finds a high degree of volatility for all private flows (including the supposedly “more stable” FDI) before the crisis hit: even aid is less volatile and more predictable in most countries. The crisis has underlined that private flows are not a stable and predictable source
Second, the country analysis in Chapter 2 emphasises the high degree of debt financing used for what appear to investment promotion agencies and international analysts to be “equity” projects. This emphasises the high debt risk which foreign private capital is bringing, which the international community needs to monitor closely to avoid future private debt crises. It also made countries vulnerable to FPC falls as the crises hit loans.
Third, the detailed analysis of country sector case studies in Chapter 4 shows that many of the “boom sectors” for FDI were not – even before the crisis – providing sustainable benefits for growth and poverty reduction, in terms of employment, budget revenue, and transfer of technology
and skills. It also shows the volatility of the boom sectors, going well beyond commodity vulnerability because of close links to sectoral booms and busts in source countries and
Fourth, investors realise that MDG progress is essential to their business success – because it increases labour skills, reduces disease prevalence, provides more local inputs, and fights climate change and other environmental degradation. But most of them are not doing anywhere near enough to pay taxes so that government can spend more on the MDGs, or (as indicated in Chapter 5) to contribute their own funds to these goals.
Fifth, in spite of major improvements in monitoring, analysis and policy formulation discussed in Chapter 6, many countries still do not know reliably what is happening to flows, or how to design policies to maximise their contribution to development of the types discussed in Chapter 7. So they remain highly vulnerable to future crises.