Issue 20: October 2002

A coordinated approach to reducing the impact of the steep reduction of capital flow into the developing world must be established to contribute to their economic growth, protect against economic crises and help lift many from poverty, according to the results of a two-year study by UNU World Institute for Development Economics Research (UNU/WIDER).

The study was conducted by leading international economists, Ricardo Ffrench-Davis of the UN Economic Commission for Latin America and the Caribbean (ECLAC) and Stephany Griffith-Jones Professor of the Institute of Development Studies (IDS) at Sussex University.

Their report, entitled Capital Flows to Developing Countries since the Asian Crisis: How to Manage their Volatility, outlines measures to encourage higher and more sustained capital flows to give greater dynamism to developing country economies and protect against capital flow volatility. These measures are urgent, given the dramatic drying up of private capital flows to developing countries since the Asian crisis.

The project’s specific international reform recommendations to encourage a return of sufficient and stable private flows include: 

• Global institutions in trade and finance need to be far more inclusive, to better represent the voices and interests of developing countries. 
• It is urgent to encourage more private capital flows by strengthening the guarantee and co-financing mechanisms of the multilateral banks, and by imaginative measures to be taken in key source countries such as the US and the UK. 
• Ensure that sufficient official liquidity is available to developing countries when private liquidity  temporarily falls. 

These conclusions and the results of the two-year project will be published in a book to be edited by Professor Griffith-Jones and Professor Ffrench-Davis and to include papers by other leading economists, including John Williamson, Jose Antonio Ocampo, Avinash Persaud and Randall Dodd.

The project also analyzed current capital flow into developing countries and concluded that their volatility and reversibility are major causes of recent large, frequent and developmentally costly crises. The group also found that presently very low or negative private flows are inhibiting growth in much of the developing world, especially in Latin America.  

The WIDER project, in collaboration with ECLAC and IDS, was officially launched in 2000 to analyze new trends in the supply of different categories of capital flows, since the Asian crisis, as well as their determinants, and suggests both international and national policies, to encourage higher  growth, investment and employment in developing countries.

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