The Transition from Official Aid to Private Capital Flows: Implications for a Developing Country

Abstract

Since the mid-1990s there has been a tremendous increase in the mobility of international capital. Cross-country trends in capital flows reveal that private capital flows now dominate, with official capital flows being reduced to a trickle. Until the early 1990s, the main source of external financing across the developing world was official development assistance (ODA) provided by the governments of high-income countries. Consisting mainly of grants, concessional loans and contributions from multilateral institutions, dissatisfaction with some of ODA’s attributes led to a questioning of ‘aid’ by both recipients and donors. Among the most important of these have been the ‘tying’ of aid, whereby conditionalities were imposed on recipient countries, ranging from mandatory purchases from the donor country to provision of market access, and sometimes surrender of ownership of national economic policies. Other factors precipitating the disillusionment with ‘aid’ have been the misappropriation of aid receipts, corruption at various points, and lack of a visible, positive relationship between ‘aid’ and poverty or economic growth.