Capital flows to developing countries: Trends, volatility and policy implications

This article reports on trends and levels of capital inflows, and the volatility of such inflows, of a sample of 60 developing countries over the period 1970-97. The data covers aid and other development finance as the principal forms of official flows, and two sources of private capital foreign direct investment (FDI) and other private capital (OPC) flows. For each type of inflow to each country, three alternative measures of volatility are calculated. To summarise the results, the countries are grouped into low-income, lower-middle and upper-middle income. The article provides evidence that official flows are less volatile than private flows and the instability in FDI is lower than in other private flows. The article also shows that the poorest countries have become increasingly reliant on aid, attracting almost no private capital and little FDI. Only the richer developing countries attract significant volumes of FDI and private capital (and both are quite volatile). The article then goes on to discuss the factors that influence inflows and the implications of these trends in inflows for macroeconomic policy.