Figure 2. Private Capital Flows Relative to GDP, Emerging and Developing Economies, 1980-2011 (in percent) 5
4
3
2
1
0
-1 80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
10
2.3. Composition As shown in Figure 3, the composition of private capital flows has changed in important ways over time. The inflow episode of the early 1990s featured a combination of FDI, portfolio flows, and bank lending. During the 1989-96 inflow episode FDI flows were roughly comparable in size to bank lending, with portfolio flows only slightly smaller. However, the share of FDI flows increased steadily over time during the 1990s. The Mexican and Asian crises primarily affected portfolio flows and bank lending, as FDI flows continued a steady climb. By the end of the 1990s FDI flows had stabilized at between 2 and 3 percent of GDP for emerging and developing countries as a group, and the episodic nature of total inflows was driven entirely by fluctuations in portfolio flows and bank lending, which have been much more volatile than FDI. FDI became dominant during the 2003-08 episode, as portfolio capital inflows have been offset by outflows to a much greater extent than during the episode of the 1990s, consistent with the two-way capital flows that one would expect to characterize a much increased degree of financial integration among the recipient countries. The upshot of this change in inflow composition, as noted by Prasad (2011), is that the external balance sheet of emerging and developing countries has evolved over time. The foreign liabilities of emerging and developing economies are now largely dominated by equity in the 5