Aggregate net resource flows to the "part I" developing countries from the countries of the OECD’s Development Assistance Committee (DAC) reached $166 billion in 1994, of which private capital flows accounted for 55 percent (table 6.6). Despite a slowdown in portfolio equity flows following Mexico’s crisis in December 1994, total private capital flows from high-income OECD countries to developing countries are expected to remain buoyant—particularly as foreign direct investment continues to grow robustly.
Two factors are driving the growing interest of industrial country investors in developing country markets. One is the improvement in long-term expected rates of return following policy reforms and strengthening creditworthiness. The other is the opportunity for risk diversification due to the low correlations between returns in developing and industrial countries. On the supply side institutional investors, especially through mutual and pension funds, are allocating more of their rapidly growing portfolios to international assets.
. . . while official aid declines
Official development assistance (ODA) from DAC countries constituted more than one-third of net resource flows to developing countries and nearly two-thirds of net resource flows to low-income countries. Although many developing countries experienced a surge of private capital flows as creditworthiness improved, for many of the poorest countries ODA is almost the only source of external financing—and it accounts for a large share of their income.
Although aid accounts for a tiny fraction of donor countries’ central government budgets, aid nevertheless comes under pressure in many countries whenever budgets are being cut. Net official development assistance fell to 0.3 percent of DAC countries’ GNP in 1994, the lowest level since 1973 (table 6.7). At the same time, the composition of aid has shifted in the 1990s, as a bigger share of ODA is diverted to disaster relief and peacekeeping operations and less is spent to support long-term development. Thus even the declining share of ODA in DAC countries’ GNP overstates the amount being spent on long-term development. With aid budgets on the decline, aid effectiveness—in reaching the poor and improving their quality of life—is becoming a major concern for DAC donors, and they are pursuing a partnership approach in directing more of their aid to poverty reduction and to countries pursuing sound policies.
The terms of ODA loans have improved considerably, with grants accounting for 80 percent of all ODA flows and for a higher share for all DAC countries except Austria, Japan, and Spain (table 6.8). The grant element of concessional loans also has risen, to an average of 62 percent. But untied aid is still less than one-half of all ODA.
Low-income countries receive 47 percent of aid flows (table 6.10). On a per capita basis Sub-Saharan Africa, which has little access to private flows, remains the largest recipient of ODA among developing regions.
The most significant increase in aid has been in Europe and Central Asia—the result of the large net inflow of official aid to the transition economies of Eastern Europe and the former Soviet Union.
International labor flows—benefits and costs
Like trade and capital flows, international labor flows offer great potential for benefit for both home and host countries (table 6.13). Migrants are often more productive in the host country, reducing labor costs there, while sending remittances back home, boosting incomes in the usually poorer home countries. But migration causes concern among unskilled workers in host countries—where there is a perception that immigration puts downward pressure on wages. As a result international migration remains much more politically charged than trade and capital flows, with public opposition to unskilled migrants rising sharply in many countries and often exacerbated by high unemployment.
Table 6a Global environment for developing economies, 1974–2006
average annual percentage change (except for LIBOR)
|
1974–80 |
1981–90 |
1991–93 |
1994 |
1995 |
1996a |
1997–2006a |
|
|
Real GDP in G-7 countries b/ |
3.0 |
3.1 |
1.4 |
2.9 |
1.9 |
2.2 |
2.7 |
|
G-7 inflation (consumer prices, weighted by GDP) b/ |
10.0 |
4.3 |
3.2 |
2.2 |
2.3 |
2.1 |
2.7 |
|
World trade volume c/ |
4.8 |
4.2 |
4.1 |
9.6 |
8.1 |
6.1 |
6.4 |
|
Nominal LIBOR (six-month rate, $)d |
9.5 |
10.0 |
4.6 |
5.1 |
6.1 |
5.6 |
6.1 |
|
Real six-month LIBORe |
0.2 |
5.2 |
1.0 |
2.4 |
3.2 |
2.5 |
3.1 |
|
Price indexes ($) |
|
|
|
|
|
|
|
|
G-5 export unit value of manufactures (MUV) f/ |
11.6 |
3.3 |
2.1 |
3.6 |
8.3 |
–2.5 |
2.3 |
|
Oil prices g/ |
26.7 |
–5.3 |
–11.5 |
–5.7 |
8.2 |
17.8 |
–0.4 |
|
World Bank nonfuel commodity price index |
–1.5 |
–5.4 |
–4.8 |
22.2 |
9.5 |
–6.0 |
1.3 |
Note: Data are as of October 1996. a. Estimates and projections. b. The G-7 countries are Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. c. Trade data refer to exports through 1993 and to the average of exports and imports from 1994 onward. d. London Interbank Offer Rate. e. Nominal LIBOR, adjusted for inflation. f. The G-5 countries are France, Germany, Japan, the United Kingdom, and the United States. g. Oil prices refer to the average of OPEC crude oil prices through 1995 and to the average of Brent, Dubai, and West Texas Intermediate, equally weighted, from 1996 onward.
Source: World Bank data and staff estimates.