Capital Flows and the Developing Countries
CHAPTER ORGANIZATION
Introduction
Capital Flows to Developing Countries
Exchange Rate Shocks
The IMF and Developing Countries
Summary
INTRODUCTION
Financial/capital account transactions affect economic development
There are reasons for the movement of capital from developed to developing countries
There are different forms such flows can take
The most common problem associated with capital flows is the sudden depreciation of the currency of a developing country and there are macroeconomic consequences of these types of depreciations
The IMF plays a controversial role in this
CAPITAL FLOWS TO DEVELOPING COUNTRIES
Capital tends to flow from the developed to the developing countries because of differences in factor abundance
Developing countries tend to run current account deficits that are offset by capital/financial account surpluses
This means that the developing countries are borrowing from the developed countries
In many cases the developing country is a net debtor
CAPITAL FLOWS TO DEVELOPING COUNTRIES
Conceptually, there is not a problem with this borrowing as long as the capital is used productively
Sadly, borrowing by governments in developing countries has a checkered history
The form that this borrowing takes is important
CAPITAL FLOWS TO DEVELOPING COUNTRIES
Debt Versus Equity
Borrowing by developing countries takes the form of either debt or equity
Payments on debt have to be made at certain points in time no matter what the economic condition of the borrower is
Debt refers to borrowing by countries in the form of 1)bonds or 2)bank loans or 3)borrowing from developed country governments
Loans from commercial banks are referred to as sovereign loans
CAPITAL FLOWS TO DEVELOPING COUNTRIES
Equity is the situation where the lender is also an owner in the company or project being financed
This is commonly FDI or the movement of portfolio capital between countries
Debt payments have to be…