MIGRATION OF FINANCIAL RESOURCES TO DEVELOPING COUNTRIES

MIGRATION OF FINANCIAL RESOURCES TO DEVELOPING COUNTRIES

MIGRATION OF FINANCIAL RESOURCES TO DEVELOPING COUNTRIES Dilip K. Das Palgrave Macmillan

ISBN 978-1-349-18293-0 ISBN 978-1-349-18291-6 (ebook) DOI 10.1007/978-1-349-18291-6 Dilip K. Das, 1986 Softcover reprint of the hardcover 1st edition 1986 978-0-333-39799-2 All rights reserved. For information, write: St. Martin's Press, Inc., 175 Fifth Avenue, New York, NY 10010 Published in the United Kingdom by The Macmillan Press Ltd. First published in the United States of America in 1986 ISBN 978-0-312-53217-8 Library of Congress Cataloging-in-Publication Data Das, Dilip K., 1945- Migration of financial resources to developing countries. Bibliography: p. Includes index. I. Capital movements-developing countries. I. Title. HG389l.D37 1986 332'.042 85-18345 ISBN 978-0-312-53217-8

To Vasanti and the innumerable hours of togetherness we had to do without

Contents Preface Glossary of Acronyms Text Tables xiii xvii xviii TRANSNATIONAL FLOW OF LONG-TERM RESOURCES - A HISTORICAL PERSPECTIVE Antiquity Medieval Period and Thereafter The Old Concept of Economic Aid America - The Debtor Nation Rationale Underlying the Capital Flows in the Nineteenth Century 5 Developing Countries of the Nineteenth Century 5 Golden Era of Resource Transfer 6 Tum of the Century 8 Government Role in the Pre-First-World-War Financial Flows 10 Scenario on the Eve of First World War 1l International Financial Relations during the First World War The Post-war Scene The Great Depression: A Thin Dividing-line Impact of the Second World War Principal Source Countries England France Germany United States I 1 3 4 12 13 15 17 17 17 19 20 20 2 INFLOW OF FINANCIAL RESOURCES AND ECONOMIC GROWTH Introduction The Supply-side Story Macroeconomics of Resource Inflows The Two-gaps Theory The Big Push Capital-absorptive Capacity Approach 22 22 23 26 26 27 27 vii

Vlll Contents Microeconomics of Resource Inflows 28 Resource Transfer and Economic Growth 30 Resource Inflows and Domestic Saving 34 The Foreign Exchange Constraint 37 Reverse Transfer 38 3 DEVELOPING COUNTRIES IN THE INTERNATIONAL ECONOMY- PROGRESS, INTERACTION AND INTEGRATION 40 Introduction 40 The Growth Scenario 41 Agricultural Sector 45 Manufacturing Sector 48 Trade 51 Commodity Trade Trends 53 Terms of Trade 58 Re-emergence of Protectionism 59 Protectionism in the Manufacturing Sector 61 Protectionism in the Agricultural Commodities 62 Emergence of the NICs 62 External Shocks and the LDCs 64 The Theme of Interdependence 65 4 THE STRUCTURE AND VOLUME OF BILATERAL RESOURCE FLOWS 69 Introduction 69 A Question of Motivation 70 Internalising the External Resources 72 The First Post-war Decade: 1946--55 72 Geographical Distribution 75 Financial Terms 76 Economic Setting During the First Post-war Decade 76 Patterns of Imports of Creditor Countries 78 The Second Post-war Decade: 195.>--65 79 Geographical Distribution 83 Financial Terms 84 Economic Setting During the Second Post-war Period 85 Pattern of Imports of the Creditor Countries 88 The Third Post-war Decade: 1966--75 91 Geographical Distribution 93 Financial Terms 95

Contents 1x Economic Setting During the Third Post-war Decade 95 Pattern of Imports of the Creditor Countries 98 The Impact of Economic Fluctuations on the Liquid Resources of the LDCs 101 The Contemporary Period: 1976-83 102 Geographical Distribution 104 Financial Terms 106 Economic Setting During the Contemporary Period 107 Pattern of Imports of Creditor Countries 112 The Impact of Economic Fluctuations on the Liquid Resources of the LDCs 113 An Overall View of the Resource Flows from the DAC 114 Countries THE FLOW OF CONCESSIONAL ECONOMIC ASSISTANCE TO LDCs FROM OPEC COUNTRIES 116 Enter OPEC 116 A Question of Motivation 118 The OPEC Aid Record 119 The Pre-1973 Period 119 Beyond 1973 120 Geographical Distribution 123 Financial Terms 125 THE FLOW OF CONCESSIONAL ECONOMIC ASSISTANCE TO LDCs FROM THE CENTRALLY PLANNED ECONOMIES 126 The Inception 126 Trade and Aid 127 The Aid Philosophy 128 A Question of Motivation 129 The Aid Record of the CPEs 130 The First Period: 1954-70 130 Geographical Distribution 131 Financial Terms 132 The Second Period: 1971-83 133 Flows to Developing Non-market Economies 135 Geographical Distribution 135 Financial Terms 136

X Contents 5 INTERNATIONAL CAPITAL MARKET AND THE DEVELOPING COUNTRIES 137 Introduction 137 The Commercial Bank Lendings 138 Growth of the International Financial Market 138 The Borrowers and the Lenders 139 The Genesis of the Eurocurrency Market 140 Eurocurrency Credits to Developing Countries 141 Financial Terms 142 Variable Interest Rates 143 Where the Money Went 144 Access to International Capital Markets 145 Trends in Bank Exposure 146 The Maturing Relationship 148 Bond Markets 149 The First Period: 1960-72 149 The Relative Insignificance of External Bond Markets 151 Financial Terms 152 The Second Period: 1973-83 152 Access of LDCs to External Bond Markets 154 Relative Significance of the Two Segments of the External Bond Market 155 Financial Terms 156 The Reversal of Capital Currents-Negative Flows to LDCs 156 Export Credits 157 Growth of Export Finance to Developing Countries 158 Export Credits and Development Finance 159 The Berne Union 160 Flow of Export Credits between 1950 and 1969 160 Flow of Export Credits between 1970 and 1983 162 Financial Terms 165 Foreign Direct Investment 166 The First Period: 1946-55 169 The Second Period: 1956-70 171 The Third Period: 1971-82 174 Changing Profile of Foreign Direct Investment 176 6 RESOURCE FLOWS TO AND FROM THE MULTILATERAL FINANCIAL INSTITUTIONS 179 Introduction 179 Contributions to Multilateral Institutions 180

Contents xi Donors' Policy Preferences Regarding the Multilateral Institutions 183 Interactions Between the Multilateral Institutions and Donors 184 International Bank for Reconstruction and Development 186 The Purpose of the Bank 187 The First Period: 1947-60 188 Two Questions: One Answer 190 The Second Period: 1961-84 191 The Programme Lending Debate 197 International Development Association 198 Introduction 198 The Sources of Funds 199 Eligibility Criteria 201 Lending Terms 202 Lending Operations 202 International Finance Corporation 205 Introduction 205 The Rationale 206 Financial Operations 207 The Modus Operandi 210 Asian Development Bank 211 Organisation 211 Evolution 212 Lending Operations 213 African Development Bank 215 Organisation 215 Evolution 216 Lending Operations 216 Inter-American Development Bank 218 Organisation 218 Evolution 219 Lending Operations 220 Multilateral Development Banks 222 International Monetary Fund 223 The Conditionality Tussle 223 Financial Assistance Policies 225 LDC Drawings on the Fund 226 The New-Found Power 230 United Nations Development Programme 231 Genesis 231

xii Contents Functions and Objectives The Two Cycles The Third Cycle and the Decline of UNDP Notes and References Bibliography Index 231 232 234 236 254 260

Preface Transnational migration of financial resources, in various forms, comes only next in importance to international trade. It influences the relations between countries or country groups and, in turn, is influenced by it. For a long time transnational financial flows have been a significant factor of the multifaceted world economy. Capital has migrated from countries that have it to those who need it. It has been a carrier of industrialisation from its first home to the other areas of the world. With the passage of time, the interest and concern in the resource flows have gone on increasing. During the last few years, hardly two days went by without the financial press carrying a news item on one kind of resource flow or the other, be they bilateral, multilateral or capital market flows. Along with this the professional interest has caught on, bringing serious scholars into this field, so much so that an institute named the Institute of International Finance was set up in Washington, in April 1983, for looking into various economic issues related to sovereign lending. The World Bank has gradually acquired a greatly enhanced, almost unprecedented, role and the International Monetary Fund has come to be the linchpin of the international financial system. The international economy has rapidly changed, the changes occurring not only during the fast-growing decades of the 1950s and 1960s, but also during the slow-growth period of the 1970s and early 1980s. Let us, however, not confuse slow growth with a no-change scenario. The level of interdependence between countries and country-groups increased more during the second period. This interdependence extended to the realms of trade, monetary system and financial flows. The migration of financial resources is an integral part of this interdependence among the nations. In the early 1970s, the emergence of OPEC as a donor-country group added a new dimension to this scene. That apart, various shocks received by the international economy gave several twists to the situation. In the recent past, the dimension of total medium- and long-term indebtedness of developing countries from all sources grew as follows: xiii

XlV Preface Year 1955. 1960. 1970. 1975. 1980. 1981. 1982. 1983. 1984. 1985. Amount (in billions of$) 8 35 60 160 401 528 582 658 717 (Preliminary) 774 (Estimated) (NB. These liability figures include neither the short-term debt nor the IMF credits used by LDCs.) Thus, the decade of 1970s brought a substantial quantitative change in the external indebtedness of the developing countries. The average annual growth rate for the decade of 1970s was 22 per cent. This rate, however, fell to 14 per cent in 1980. The deceleration continued thereafter, and annual growth rate of liabilities further declined to 13 per cent in 1983, 9 per cent in 1984 and 8 per cent in 1985. The average for the period 1980-5 plummeted to 11 per cent, which is half of the average for the 1970s. The quantitative change happened, pari passu, with a qualitative transformation in the debt profile of the developing countries. In the 1960s, most of these flows came from bilateral and multilateral sources in the form of grants and concessional loans. Capital market flows consisted largely of suppliers' credit and direct foreign investment. Around 1970, this pattern gradually changed and a long-run shift towards borrowing from the capital market took place. In 1970, the official development assistance and capital market flows contributed 44 per cent each to the net flows to developing countries, in 1981 the share of official development assistance declined to 29 per cent of the total and that of capital market flows rose to 61 per cent. The multilateral resource flows soared from 2 per cent of the net resource receipts in 1970 to 8 per cent in 1981. Over the years, the volume and importance of capital market flows increased over those from bilateral sources. The first intended objective of this book is to delve into the trends in the migration of various kinds of financial resource flows to developing countries during the post-war period. It begins with the bilateral flows and quantifies them for each creditor country-group for the period under consideration. That is not to say that it only presents a

Preface XV quantitative scenario and ends the story there. It relates the trends to the economic, financial and political events on the international scene and it tries to ordain their influence on the flows to developing countries. It also examines the terms and conditions of the resource flows, alterations in their geographical distribution with the passage of time and the changes in the sectoral pattern of allocation. It explains the trends in the background of the value and_ volume of the world trade, and the pattern of imports of the creditor countries from the debtor countries, essentially because it is this that determines the repaying capability of the latter country-group. Thus, it does not study the migration of financial resources in the manner of a chronicler. Inasmuch as it is a retrospective study, it has the advantages of hindsight. The second focus of the book is on examining the resource flows to developing countries from the international capital markets. Initially, as indicated, these flows were only in the form of direct foreign investment and export credits. Subsequently, the developing countries started utilising other instruments to raise capital, i.e. foreign and international bonds, and Eurocredits and Eurobonds. An identical exercise has been performed with these flows as well, namely, a trend analysis, the variations in quantum of flows and reasons thereof, impact of economic, financial and political events on these flows, and their terms and conditions. The third major source of external resources to developing countries is the multilateral financial institutions. The principal ones are the Bretton Woods institutions, the three regional development banks and the United Nations Development Programme. The capital flows from these institutions have again been given the same treatment as the other two kinds mentioned above. Indubitably, the financial flows from these three different sources have three different characters and personalities. Therefore, in order to paint a complete canvas, all three need to be looked at. Based on these analyses, an attempt has been made to look into the immediate future. After a comprehensive qualitative and quantitative gleaning of facts and figures, and their analysis, an attempt has been made to see what the developing countries can reasonably expect in times to come, and why. Compiling various statistical time-series from the primary sources and presenting them in a lucidly perceptible manner is a major task of this study. These time-series form the basic parametric skeleton around which the whole superstructure is constructed. A great deal of importance was given to their culling, and having done that the sources and

XVI Preface the quality of data are talked about at length in the relevant subsections. The first part of the book comprises the first three chapters and lays the background for the next three, which deal with the three substantive strands of analyses. The first chapter takes a historical overview of the migration of financial resources and culminates on the eve of the Second World War. Two of the most interesting periods in the history of capital flows are: the nineteenth century, particularly five decades prior to the First World War; and the inter-war period. There are lessons to be learned from this history. While the debate on the role of foreign capital inflows still flourishes, it is widely agreed that they have an impact on economic growth. These flows also mean an increase in financial dependence of borrowing countries and rising relative debtservicing obligations. The second chapter looks into various macroeconomic aspects of capital inflows; it surveys and comments upon the various theoretical frameworks in this regard. Chapter 3 relates to the post-war economic scene in developing countries. How have the various sub-groups among developing countries performed? What were the economic circumstances in which developing countries came to be at the receiving end of the resource flows? How have their terms of trade have fluctuated? What is the international economic climate? How have they reacted to various exogenous shocks? These factors have a direct bearing on the financial capabilities of the developing countries. It is therefore a necessary prelude to what follows. The thematic strands of the next three chapters have already been detailed in the preceding section. Chapter 4 divides the post-war period into smaller and functional sub-periods, and examines the bilateral flows, i.e. the transfer of official development assistance from the donor country groups, namely the OECD, OPEC and the centrally planned economies. Chapter 5 deals with the capital market flows; again these flows have been sub-divided into various sub-periods. The issues that Chapter 6 addresses relate to financial flows from the multilateral institutions. I hope that the study will contribute to building a stronger foundation for international economic and financial policies and be of interest to academics and professionals in the field of development finance and economic growth. Geneva DILIP K. DAS

Glossary of Acronyms ADB AfDB BOP CPE DAC FDI GATT IBRD ICOR IDA IDB IFAD IFC IMF LDC LIC LLDC MFI MIC NIC ODA OECD OPEC UNDP UNHCR VIR WEP Asian Development Bank African Development Bank Balance of Payments Centrally Planned Economy Development Assistance Committee Foreign Direct Investment General Agreement on Tariffs and Trade International Bank of Reconstruction and Development Incremental Capital-Output Ratio International Development Association Inter-American Development Bank International Fund for Agricultural Development International Finance Corporation International Monetary Fund Less Developed Country Low Income Country Least Developed Country Multilateral Financial Institution Middle Income Country Newly Industrialising Country Official Development Assistance Organisation for Economic Co-operation and Development Organisation of Petroleum Exporting Countries United Nations Development Programme United Nations High Commission for Refugees Variable Interest Rate World Employment Programme xvii

Text Tables xvi 2.1 Regression equations 3.1 Differences in Growth Rates of LDCs 3.2 Growth rates of total and per capita GDP and real income in LDCs 3.3 Distribution of GDP (per cent) 3.4 Agricultural production indices in LDCs 3.5 Food and agricultural production 3.6 Index of production in manufacturing industries in LDCs 3. 7 Share in manufacturing value-added (MV A) 3.8 Index numbers of terms of trade of non-oil LDCs 4.1 Gross long-term capital inflows, 1946--55 4.2 Geographical distribution 4.3 Effective interest rates 4.4 Value and volume of world trade, 1946--55 4.5 Bilateral flows (net disbursement), 1956--65 4.6 Value and volume of world exports, 1956--65 4. 7 Imports of industrial areas from developing countries, 1956--65 4.8 Trends in the terms of trade, 1956--65 4.9 Bilateral flows (net disbursement), 1966--75 4.10 Financial terms, 1970-5 4.11 Value and volume of world exports, 1966--75 4.12 Imports of industrial areas from the non-oil developing countries, 1966--75 4.13 Trends in terms of trade, 1966--75 4.14 Total reserves of non-oil developing countries, 1966--75 4.15 Bilateral flows (net disbursement), 1976--83 4.16 Financial terms, 1976--83 4.17 Value and volume of world exports, 1976--83 4.18 Imports of industrial countries from non-oil developing countries, 1976--83 4.19 Trends in the terms of trade, 1976--80 xviii

Text Tables XIX 4.20 Bilateral flows from OPEC countries, 1973-83 4.21 Trade of LDCs with CPEs, 1963-83 4.22 Bilateral flows from CPEs (net disbursement), 1954--70 4.23 Bilateral flows from CPEs (net disbursement), 1970-83 5.1 Volume of Eurocurrency bank credits to developing countries 5.2 Concentration of borrowing 5.3 External bond issues of LDCs, 1960-72 5.4 Financial terms 5.5 External bond markets, 1973-83 5.6 Net flow of export credits to LDCs, 1956--69 5.7 Net flow of export credits to LDCs, 1970-83 5.8 Foreign direct investment in LDCs, 1946--55 5.9 Foreign direct investment in LDCs, 1956--70 5.10 Foreign direct investment in LDCs, 1971-83 6.1 Contributions to multilateral institutions, 1956--83 6.2 Lending operations of the World Bank, 1947-60 6.3 Lending operations of the World Bank, 1961-84 6.4 Replenishment of IDA resources 6.5 Resource flows from IDA, 1961-82 6.6 Financial operations of the IFC, 1957-82 6.7 Lending operations of the ADB, 1967-84 6.8 Lending operations of the AfDB, 1967-82 6.9 Lending operations of the IDB, 1963-83 6.10 Net drawings of the non-oil developing countries from the IMF, 1952-84 6.11 Project expenditure under various UNDP programmes, 1966--81 6.12 Allocation of resources under various UNDP programmes 6.13 UNDP targets and voluntary contributions