Encouraging private capital flows and remittances

Table 2 Private capital flows to Africa, 1998 2003

Private capital flows have come to play the dominant role in development finance, eclipsing both official bilateral and multilateral flows.

Below are several recommendations that should help to encourage private capital flows and remittances to African countries

Capital flows

These factors considerably limit those countries' ability to attract foreign direct investment and other international private capital flows.

Both private capital flows and workers' remittances constitute important sources of development finance for Africa as a whole.

The financial crisis reduced private financiers risk appetite, making long term exposures unappealing. Net private capital flows, particularly to developing economies, have become more volatile.

Why Capital Flows Uphill

Capital flows and remittances

C. Investment and capital flows

Private capital flows have an important role in complementing developing countries' domestic resources, the transfer of technology, employment generation and entrepreneurship building.

Investment and private flows

True, private capital flows have surged in the wake of global liberalization and these countries privatization schemes. But private capital flows have proven to be volatile and prone to sudden interruptions, as exemplified by the Asian and Russian financial crises of the late 1990 s, or more recently by investors pulling out from infrastructure sectors.

What national and international efforts can be made to increase the stability of private capital flows to developing countries and to maximize their development impact?

Capital Flows and Growth in Africa, Geneva, UNCTAD.

E. The international environment Financial liberalization and capital flows

For example, of the 200 billion in total US resources dedicated to development in 2010, 87 came from private flows. By contrast, in the 1960 s, official overseas development assistance accounted for 70 of capital flows into developing countries.

a Private flows include those identified as workers' remittances and other private remittances .

Over the last two decades a period when globalization opened up the world financial system private capital flows have contributed more to developing economies growth than has ODA. Indeed, in 2009, more than 1 trillion in private capital flowed to developing countries nine times more than total aid.

Expressing concern that net financial flows to developing countries continued in 1999 the contraction that had begun with the onset of the financial crisis in 1997, and regretting the continued marginalization of the least developed countries from private capital flows,

Sub theme 2 Trade, investment and private flows

Some sovereign debtors and private creditors have been attempting to develop voluntary Principles of stable capital flows and fair debt restructuring in emerging markets , but progress has been slow.

Recognizing that remittance flows constitute sources of private capital and that remittances have increased over time, complement domestic savings and are instrumental in improving the well being of recipients,

But even though net international capital flows are going the wrong way, there are still substantial gross capital flows outward from the world economy s core to its periphery. And we can hope that these capital flows will carry with them the institutions and managerial expertise that have made the core so wealthy.

Private capital, which accounts for more than 90 of capital flows to developing economies, will remain the dominant source of long term financing. But the availability of long term capital appears to have been impaired, as traditional providers of equity to infrastructure projects, for example, have become less able or willing to invest.

To address in the relevant international fora the urgency of measures at the global level to monitor short term capital flows, particularly in respect of the sources and movement of speculative capital, and to protect the autonomy of developing countries in managing capital flows and choosing their capital account regime.

If China eases restrictions on cross border capital flows, an unexpected shock could trigger large scale capital flight, bringing down the entire financial system. Given this, it is vital that China maintains controls over short term cross border capital flows in the foreseeable future.

It's financeable in the private capital market.

Currently, foreign direct investment has been the largest source of private flows.

With regard to the mobilization of international financial resources for development, we believe that international private capital flows, and in particular attracting foreign direct investment, is an essential complement to international and national development efforts.

Some would object that the renminbi is weak because China is experiencing capital outflows by private investors, and that some of this private money also flows into US financial markets. This is technically correct, but it is already factored into the changes in interest rates described above.

(iv) Initiate measures that mitigate the impact of excessive volatility of short term capital flows.

A factor worthy of note is that developing economies in the ESCAP region have become net exporters of capital as persistent current account surpluses in some countries combined with a sharp increase in net private capital flows have been reflected primarily in the substantial accumulation of official reserves.

The private sector is becoming the main source of FDI flows to developing countries.

Dasgupta, Dipak and Dilip Ratha (2000). What factors appear to drive capital flows to developing countries?

Domestic resource mobilization, remittances from expatriate workers, private debt and equity flows, and philanthropic contributions exceed official international aid by a wide margin. Private flows are no longer the tail, but the dog that wags the development agenda.

This can be seen in the behaviour of private flows over the years since Monterrey.

Table 3 Private remittance flows to Africa, 1998 2003 (In billions of United States dollars)a

(d) African authorities should view capital and remittance flows as an important part of their national economic statistics.

Freer capital flows will give poor countries precisely this access, as the greed of investors in rich country leads them to venture into poor regions where capital is scarce.

At the same time, since returns to capital are kept low by high wages, very little investment occurs. The excess of savings over investment flows abroad as capital exports.

But it is just as essential that developing countries maintain an appropriate degree of policy autonomy in managing capital flows and choosing whatever capital account regime they deem appropriate.

One could trace its beginnings to the 1970 s, when recycled petrodollars fueled large capital inflows to developing nations. But it was only around 1990 that most emerging markets threw caution to the wind and removed controls on private portfolio and bank flows.

10. Reiterates that measures to mitigate the impact of excessive volatility of short term capital flows and to improve transparency of and information about financial flows are important and must be considered