Capital flows: the case of emerging capital markets competitiveness

Abstract

Development economists interpret that one of the reasons behind the lagged economies of LDCs is that they have very low savings rate i.e. they lack finance to their investments. Accordingly, the drive to foreign finance ensues. And, because of unwilling foreign investors to approach LDCs markets, the basic sources of finance were in the forms of official loans and grants as well as syndicated bank loans. Whereas official financial inflows have continued their growth, especially to low-income countries, syndicated bank loans decreased for sometime as a result of many LDCs being unable to pay their debts, let it principals or services. This triggered the notorious debt crisis in 1982 when Mexico announced its inability to pay its debts. Many countries were unable to pay their debts, therefore, the debt crisis extended up to 1989 as the peak default period; with some countries, especially in Sub-Saharan Africa, are still mired. However, in recent years a lot of developing countries have received substantial capital inflows, specifically, private inflows in the form of FDI as well as portfolio investments. Most of these inflows have been of a short-term portfolio investment nature such as: bonds and equities; short-term instruments such as certificates of deposits (CDs); commercial papers (CPS); and purchases of short-term domestic bonds (World Bank, 1993).