Aid, private capital flows and external debt: A review of trends

Abstract

As the last chapter has shown, the central accumulation processes of the LDC economies are dominated by external sources of finance. In the long term, if economic growth can be successfully sustained, it is reasonable to expect that domestic resource mobilization will be considerably strengthened, and it is important that policy efforts seek to accelerate this process. But for the immediate future, the basic policy issue which must be addressed in relation to financing development in LDCs is whether external finance is both sufficient for, and supportive of, economic growth, poverty reduction and sustained development. In addressing this question, it is helpful first to consider the sources of external finance and the form they take. The possible sources of finance include, on the one hand, official capital flows in the form of grants or loans, provided by bilateral and multilateral aid agencies, packaged with or without technical assistance, and on the other hand, private capital flows from banks, capital markets, companies and individuals, which take the form of short-and long-term loans, acceptance of company and government bonds, and portfolio and direct investment. These capital inflows may or may not be debt-creating, and net capital outflows generated by residents may also reduce total resources available for finance, offsetting net capital inflows generated by nonresidents.