SECTION 40
Managing Capital Flows Raj Nallari and Ababyomi Alawode
For several decades, developing countries have complemented external official sources of funding with private forms of financing to support their development. As increasing globalization led to the removal of barriers to resource flows, cross-border movements of private capital have become an important feature of the global economy and dominate capital flows for many developing countries, especially for emerging markets. But these capital flows have been volatile, with large swings—as when capital flows sharply increased before the East Asian and other financial crises in emerging markets in the mid-1990s and then abruptly declined at the crises onsets. In the years preceding the recent global financial crisis, there was again a surge in the flow of private capital to developing countries. Between 2003 and 2007, net private capital flows to these countries rose to unprecedented levels, peaking at $1.2 trillion in 2007 (see table 40.1). Strong performance in emerging economies and relatively higher rates of return in these economies were partly responsible for this. As the global financial crisis unfolded, however, many emerging markets experienced substantial capital outflows combined with sharply reduced inflows. It became more difficult and more expensive to access international capital markets as investors became strongly risk averse and sought safe havens in the United States and Europe.
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