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World Bank Says Record Capital Flows to Developing Countries in 2006

A new World Bank report says the flow of private capital to developing countries hit record levels in 2006. At the same time, though, the rate of growth is slowing.

The Global Development Finance Report says net capital flows last year reached $647 billion. World Bank Senior Economist Douglas Hostland is co-author of the report.

“I think on the whole it’s quite good news. First of all, let me say that underlying the private flows we have another year of quite strong growth. We have developing countries growing at over seven percent. And this is the fourth year in a row we’ve seen growth above five percent. And so the flows in private capital reflect these underlying strong economies. So for those economies that have access to private capital we’ve had another very strong year.” He says.

But the growth rate of capital flows to developing countries is on a downward trend. Between 2005 and 2006, it dropped from 34 percent to 17 percent. However, Hostland says that’s to be expected, along with lower economic growth rates for developing countries.

“So far, we’ve seen growth increasing at an unsustainable rate. We expect growth to moderate somewhat over the next few years. Along with that we expect to see a decline in private capital flows. Now this is actually a welcome development in the sense that we shouldn’t expect growth to be continuing at an unsustainable rate and thereby causing impending inflationary pressures. The objective here is to bring growth down to a smooth adjustment so that we’re talking about a very moderate decline in growth and it’s very broadly based across countries, across regions,” he says.

The World Bank senior economist says sub-Saharan Africa has fared well economically in recent years.

“If you look back at the 1980s, we saw that about 15 countries in sub-Saharan Africa, their per capita income fell by more than three percent a year. But so far this decade, over the last four years, only four countries fall into that category. Also if you look back to the 1980s, we saw that per capita incomes grew by more than one percent a year in only 11 countries. And so far this decade, we see that in 30 countries. So, it’s not only that growth has been robust and strong over several years in a row, but I think more importantly it’s been much more pervasive across countries,” he says.

The bank’s Global Development Finance Report looks at 135 countries, many of which do not have access to private capital. Hostland says as a result many rely on foreign aid, and the news on that front is not as good as it once was.

Hostland says, “Most people would agree developments have not been as positive as anticipated. We’ve seen a number of commitments by donors over the last few years to scale up aid substantially and just thinking back at the G8 summit in Scotland where the G8 donors announced commitments to double aid going to Africa by 2010. But so far we haven’t seen much evidence of this. We’ve seen some recent numbers show that much of the increase in aid in the last two years, 2005 and 2006, has gone to debt relief to only two countries. And if you abstract from this we haven’t seen much of an increase in all in official development assistance.”

The World Bank report says, “Developing countries have come to account for a large share of the growth of the world output and trade – a fact that is increasingly recognized by international investors.” It adds, “Most developing countries have taken advantage of external conditions to implement domestic policies designed to reduce their vulnerability to financial turmoil and reversals in capital flows.”