During the last decade a major change has occurred in the composition and volume of financial flows to developing countries. (See Table 1.) Official development assistance (ODA), traditionally of special interest to developing countries, while increasing slowly until 1994, thereafter began to decline and in 1997 had fallen below the 1990 level.6 At the same time, however, the total net resource flows from DAC member countries and multilateral agencies to "aid recipients" (which also includes economies in transition, offshore centres, and territories of donor countries), increased two and a half times, from US$ 130 billion in 1990 to US$ 325 billion in 1997.7
This increase in total net inflows has been due entirely to private capital flows, which rose from US$ 43.6 billion in 1990 to US$ 252 billion in 1997. This represented an increase from 33.6 per cent of total net resource flows to 77.7 per cent, while ODA declined from 39 per cent to 15.3 per cent. Over the period 1995-97, private flows amounted to almost three times the magnitude of official development finance flows, or over four times the magnitude of ODA.
The rise in private capital flows, and in particular of foreign direct investment, was celebrated by many as evidence of the success of market liberalization and was seen as an indication of the potential for private flows to replace official concessional flows.
Quite apart from the dubious nature of this claim regarding liberalization, the East Asian crisis and the subsequent crisis in Brazil have changed the situation and have introduced uncertainty as concerns the outlook for private financing flows to developing countries. Just as commercial banks withdrew from lending to developing countries after the Latin American crisis of the 1980s, private investors are, at least for the time being, more circumspect regarding investing in developing countries.
The flow of private capital to developing countries has not been evenly distributed. Most of the increase in private capital flows went to only a handful of middle income countries in East Asia and Latin America. Altogether twelve countries account for over 80 per cent of private flows to the developing countries. Six countries -- Argentina, Brazil, China, Indonesia, Malaysia, and Mexico -- remained consistently among the top recipients of FDI during the 1990s. China was the single largest recipient of net private flows, accounting for more than 60 per cent of the region's total and 25 per cent of the private flows to all developing countries.8
Generally speaking, developing countries with little or no access to international private capital markets are those where both incomes are low and local markets are small, and where economic growth has been modest, or altogether absent. For the majority of developing countries which are bypassed by private capital, official flows are therefore their principal and, in some cases, the only source of external capital.
Yet, in line with the overall decline in net receipts of ODA, OECD data indicates that there has been a decline in net receipts of ODA by Sub-Saharan Africa, the poorest continent, from US$ 18.9 billion in 1994 to US$ 15.1 billion in 1997. Similarly, the least developed countries experienced a decline from US$ 16.7 billion in 1995 to US$ 13.5 billion in 1997. (Table 2.)
It is also important to appreciate that most bilateral aid goes to the fifteen or twenty countries or particular interest to each donor country, leaving many developing countries with very small inflows of even official external capital. Most of these chosen few have topped the list for more than a decade.
Official concessional flows, as indicated earlier, originated as part of the efforts to rebuild Europe in the wake of World War II and were subsequently extended to developing countries. The rationale for concessional finance for the purposes of economic development was fairly straightforward. It was recognized that poor countries had only a limited debt-servicing capacity, which meant that borrowing from commercial sources could play only a relatively minor role in financing development, at least in the early stages. Private lending, because of its generally short-term horizon, was also held to be unsuitable for financing projects with long gestation periods, such as infrastructure projects, which were the focus of reconstruction and development efforts at the time.
But there were also macroeconomic considerations that justified concessional finance. Foreign financing was needed to make it possible for developing countries to invest more than what their domestic savings could allow. This would also help to supplement the countries' foreign exchange resources, which were generally severely constrained. Because of a general perception (born out of the 1930s Great Depression) that rich countries would under-consume, capital flows to developing countries were also seen to have the incidental benefit of helping to sustain overall higher levels of economic activity and growth in industrial countries.
During the earlier years, when central economic planning was favoured by many of the countries of the South, domestic policymakers as well as their counterparts in bilateral and multilateral development financing agencies relied on economic models to determine foreign financing requirements which were directly linked to a targeted economic growth rate. The basic approach consisted of projections of export earnings and imports related to a stipulated rate of economic growth, on the one hand, and projections of required domestic investment (usually derived by multiplying the incremental capital-output ratio, or ICOR, by the growth rate) and of domestic savings.
This approach came to be called the "two-gap" model, and served as the basis for discussions and donor pledges of foreign assistance in the World Bank-led aid consortium meetings. The economic rationale for foreign assistance was, however, in practice often subordinated, at least by some of the largest bilateral donors, to the pursuit of their foreign policy goals in the context of the East-West conflict. The other side of this coin, however, was that the East-West rivalry gave some influence to the developing countries, whose views and position, individually and as a group, mattered to the big powers. It was at least partly due to this that the developing countries, in the early 1970s, were able to secure the industrial countries' agreement on a target for official development assistance (ODA) of 0.7 per cent of their GNP.
Over the years, political considerations, far from disappearing with the end of the East-West conflict, continue to play a major role in determining the allocation of official flows. The difference is that, instead of support being given to countries on account of their position in this conflict, foreign assistance is now directed to countries on the basis of their adherence to the principles and policies of free markets, trade liberalization, and privatization. During the 1980s and 1990s, a large component of the lending from the World Bank and other multilateral institutions, for example, was made in support of structural adjustment programmes, which aimed at market-oriented policies and institutional reforms in developing countries. This was also an important factor in the rapid expansion of official flows to the economies in transition over the past decade.
Thus, there is now a common tendency, on the part of bilateral and multilateral donors, to equate "aid-effectiveness" not with actual results with respect to output growth, general living standards, employment level, etc., but with their success in bringing about the stipulated policy and institutional change in the recipient country. It is also the case that donors have become increasingly and openly explicit in linking the provision of foreign assistance with their commercial and financial interests.
Official Development Assistance
As noted above, total DAC net disbursements of official development assistance have experienced a declining trend since 1994, the decline being greater for bilateral than for multilateral flows. (Table 1) Both bilateral concessional and non-concessional flows have experienced a considerable decline.
Official Development Assistance (ODA), a component of official flows, merits detailed attention because of its particular relevance for developing countries. Comprising grants, or loans with low interest, long grace periods, and long periods for repayment -- it was one of the principal means of helping meet developing countries' needs for external financial resources. It embodied an explicit commitment of the industrial countries to support financially the development of the South.
In order to quantify the commitment and obligation, the notion of having a target for donors of development assistance was first suggested as long ago as 1958 by an NGO, which proposed that 1 per cent of the North's GNP be transferred to the developing countries in the form of grants and concessional loans. Ever since, the measurement, content and implementation of the target have been major issues in the development dialogue and negotiations. Years passed in discussion and debate before the 0.7 per cent target was incorporated into the Strategy for the Second Development Decade adopted in 1970. It stated that each developed country should attempt to transfer to developing countries by the middle of the 1970s a minimum net amount of 0.70 per cent of its GNP at market prices. As defined, official development assistance was to be understood as bilateral grants and loans on concessional terms, and official contributions to multilateral agencies.9
It was expected that setting the 0.7 per cent aid target would help to reverse the decline experienced in the level of ODA since 1960, when it amounted to 0.52 per cent of GNP of DAC member states. But, the long term trend has continued steadily downwards. Although in the 1970s and 1980s, the volume of ODA increased by 2 to 3 per cent a year in real terms, the target was far from being met collectively by DAC member states, with the ODA/GNP ratio hovering around 0.35 per cent.
The end of the East-West conflict marked the beginning of a steady decline in DAC net ODA. Thus, the hopes for a "peace dividend", namely that industrial countries, when reducing their defence expenditures, would make available some of the saved resources for official assistance to developing countries, did not materialize. To the contrary, the developing countries find themselves now competing with a number of countries in transition for scarce official assistance..
Between 1990 and 1997, total net ODA flows declined by US$ 5 billion, from US$ 53 billion in 1990 to US$ 48.3 billion in 1997. (See the penultimate row of Table 1.) Over this period the ratio of official development assistance to GDP of DAC members has steadily declined from an average of 0.33 per cent for 1986-87, 0.30 per cent in 1993 to 0.22 per cent in 1997. (Table 3.) This is the smallest share of DAC countries' GNP given in aid since such statistics first began to be collected in the 1950s. Moreover, it is significant that all of the real fall in ODA in recent
years reflects the decline in contributions by the world's largest economies. Non-G7 countries now provide 28 per cent of DAC ODA, that is, double their share in total DAC GNP.
The decline in ODA over the years has been due to several causes. An important factor was the tight budgetary situation that many industrialized countries began experiencing in the early 1980s. The way governments chose to tackle this problem -- reduction of both public expenditures and domestic taxes -- left the funding of ODA with very low priority. In fact, national legislatures in a number of countries became more stringent about foreign assistance, partly in view of cuts in domestic welfare programmes. Declining political support for bilateral assistance was also fuelled by a widespread perception that foreign assistance had yielded poor results and, in some instances, buttressed disreputable regimes in the developing countries while creating expensive aid bureaucracies in the donor countries.
More importantly, however, support for providing foreign assistance declined because of the rise of the new ideology in the leading donor countries which caused a shift in public policy. This shift involved a change in emphasis from the pursuit of full-employment to fiscal conservatism, along with policies inspired by the doctrine of less government and free markets. This led to a common belief in most industrial countries that developing countries did not suffer from some basic structural weaknesses or from the impact of an unfavourable external economic environment that warranted concessional finance, but from market interventions, rigid labour markets, government regulations, and the state's encroachment of what was held to be the private sector domain. It was held that, if developing countries were only to rid themselves of these ills, private international capital flows would meet their requirements for external resources to aid their capital accumulation.
The global figures provided on ODA do not quite convey the true picture of the decline in assistance flows from the viewpoint of developing countries. For one thing, as already noted, there are today more countries competing for DAC funds with the developing countries in Asia, Africa and Latin America, which were the original intended recipients of flows under the 0.7 per cent target. The ODA flows to the 10 CEECs/NIS countries in the Part I list have risen from US$ 0.6 billion in 1993 to US$ 1.4 billion in 1997. 10 (Table 4.) The total of ODA flows to the CEECs/NIS countries, to the territories of the donors and to high income developing countries in the Part I list rose from US$ 1.7 billion in 1993 to US$ 2.3 billion in 1997. If these are deducted, the volume of ODA flows to developing countries of Asia, Africa and Latin America falls from 0.30 to 0.29 per cent of the donors' GNP in 1993 and from 0.22 to 0.21 per cent in 1997.
But this is not all. For some time now the donors have put a broad interpretation on what constitutes development assistance, and include categories which bear little relationship to the need of the developing countries for long term development capital. Thus, the range of purposes for which ODA funds are used has been expanded to include debt relief; subsidies on exports to developing countries; food aid which disposes of agricultural surpluses resulting from government subsidies;
provision of surplus commodities which would otherwise have little economic value; administrative costs; payments for the care and education of refugees in the donor countries; grants to NGOs and to domestic agencies to support emergency relief operations; and technical co-operation grants which pay for the services of nationals of the donor countries. Some of these items are discussed in greater detail below.
Debt service support. Many developing countries are experiencing serious difficulties in servicing their official bilateral and multilateral debts. Donors have started to provide debt relief in certain extreme cases, which amounted to US$ 2.7 billion in 1993, US$ 3.7 billion in 1995, and US$ 3.1 billion in 1997. (Table 5.) The cancelled debt service payments are counted as ODA. This can cover the cancellation of military debt, the provision of debt relief on non-ODA debt, and payments to the international financial institutions to service the multilateral debt of some poor countries. The value of debt relief to the recipients is not in question, but the fact is that, in cases where debt is not actually being serviced, this entails no net addition to the resources available to the country for economic development.11
Export promotion. Donor countries are under increasing pressure from businesses to strengthen the trade/aid link, but such expenditures are more in the nature of domestic export promotion rather than development assistance. ODA, for example, is sometimes used to subsidize export credits to finance purchases in the donor countries. Food aid is also now included in ODA. OECD countries spend over US$ 300 billion a year on agricultural subsidies that result in the over-production of a wide range of commodities. The surplus stocks of milk powder, butter fat, meat, cheese, wheat, corn and other commodities are provided to the developing countries, valued at world market rates, and then shown as ODA when reporting to OECD. Often
these surplus stocks have little value to the donor countries, and their disposal in developing countries requires no additional budgetary appropriations and tends to overstate the performance of and burden on donor countries. From the perspective of the developing countries, however, while meeting the immediate needs, the disposal of food aid can harm long term development and food security, as it depresses the prices of locally produced goods and discourages their production, undermines livelihoods of important population groups giving rise to social unrest, political tensions and migration to cities, and can cause a fall in exports from recipient countries.
Humanitarian assistance. Compared with the 1980s, there was an increase in official flows for humanitarian assistance in the early 1990s. In 1997, bilateral emergency and distress relief totalled US$ 2.2 billion. Several donors charge to the aid budget the cost of domestic programmes to support refugees and grants to overseas students. Many of these programmes were previously financed from other budget sources and not charged to the foreign aid budget.
Other items included in ODA. Technical co-operation grants currently account for around 27 per cent of ODA, reflecting payments for the services of donor country nationals and consultants, some of whom never leave their own countries. The costs of administration of development assistance programmes and contributions to NGOs which help to administer the emergency assistance and development programmes are also included as ODA.
In short, the composition of ODA has drifted considerably away from the original intent of providing long term capital for development on favourable terms. It is true that many items of expenditure charged to ODA, notably humanitarian assistance, do benefit the recipients in important ways, but some are purely domestic expenditures that benefit the donors and some are fictional from the point of view of their economic cost, such as the provision of surplus commodities.
Expenditures which do not directly promote higher levels of investment, namely, debt relief, technical co-operation, food aid, emergency relief and administrative costs, amounted to US$ 21.9 billion in 1997. The revision of the OECD data to exclude these items results in a decline in bilateral ODA flows from US$ 32.4 billion to just over US$ 10 billion in 1997. The revised total of bilateral and multilateral ODA for that year amounts to US$ 26 billion rather than US$ 48 billion, or only 0.12 per cent of GNP (Table 5).12
The situation outlined above indicates a significant erosion in ODA in comparison with its original intent and content, and in relation to the 0.7 per cent target. It will no longer suffice to merely repeat that ODA targets should be fulfilled. What is required, in view of the policy trends in the North and the mounting need for and importance of concessional flows to a large number of countries in the South, is a fundamental and comprehensive review of the approaches by the international community to the question of concessional financial flows for development, covering the estimated needs, the composition and sources of concessional flows, the quantity and terms on which they are available, and the destination and uses.
The rise in private capital flows to developing countries is in part both a reflection and consequence of the shift away from state economic activity towards the market and the growth of the private sector that has taken place since the late 1970s. Private capital flows to developing countries have also reflected investor goals, attitudes and strategies, both in the case of multinational companies and investment funds. The forces behind the various types of private capital flows are somewhat different, and no single explanation can explain the behaviour of the aggregate.
Foreign Direct Investment
An important feature of private flows (comprising commercial lending, FDI and portfolio investment) in the 1990s has been the shift from commercial bank to non-bank sources of external finance. The rise of FDI to developing countries is one indicator of the pace of globalization, as multinational corporations (MNCs) expanded or took over production facilities abroad. This was motivated by a complex of factors. While the traditional reasons of wage costs and closeness to markets or sources of raw materials continued to be important, strategic decisions concerning specialization and corporate mergers and acquisitions were also prominent factors. Particularly in the so-called emerging markets, FDI has also been attracted by the pace of privatization and increased private sector financing of infrastructure projects, especially in countries with large and growing markets and macroeconomic stability.
Industrial country multinationals, particularly those of the United States, United Kingdom, and Japan, account for the major part of the flows to and stock of foreign direct investment in the South. In recent years there has also been a noticeable increase in FDI from developing countries, such as Korea, Taiwan (China), Thailand, Brazil and Chile, to other developing countries.
The concentration of FDI flows in a handful of developing countries has been noted earlier. The group of developing countries receiving the bulk of FDI is rather diverse, and there does not appear to be a strong relationship between the degree of trade and financial sector liberalization and the amount of FDI a country receives. Controls and regulations governing capital flows remain strong in China, but it receives more FDI than any other country, thanks to its large and rapidly growing market and cheap labour. Malaysia and Thailand also received much more FDI than the more liberalized Latin American countries, and African countries received little FDI despite their moves to liberalize and open up their economies. Tax and other incentives offered by host countries also seem not to be important considerations in attracting FDI. In short, the principal pull factors appear to be the availability of some high value natural resources, the size and growth of the domestic market, the proximity of other large markets, the possibility of high profits and the assurance of being able to repatriate such profits, and the availability of skilled labour.
It is, however, important to note that the data on flows of FDI are more approximate than accurate, for there are significant problems of definition and interpretation of the data. According to the World Trade Organization (WTO), for example, FDI "occurs when an investor based in one country (the home country) acquires an asset in another country (the host country) with the intent to manage that asset. The management dimension is what distinguishes FDI from portfolio investment in foreign stocks, bonds and other financial instruments." The interpretation of `acquires an asset' or `intent to manage' is far from precise.
The common sense understanding of FDI as flows to finance investment projects is no longer sufficient. Investors attach a value to the intangibles (technical and managerial expertise and marketing networks) and this is included in the estimate of their equity contribution together with development costs incurred in the home countries. These components do not correspond to any actual inflows of capital into the recipient country, and they are hard to give value to in normal circumstances, but for developing countries their accuracy is particularly difficult to assess. These ambiguities have been a cause of much corruption in deals relating to foreign private investment. It is clearly advantageous to the investor to inflate the value of the investment since it can affect the value of benefits from tax holidays, repatriation of profits, and the allowance for depreciation.
What constitutes foreign management is equally unclear. Some countries may consider foreign ownership of 20 per cent of the assets of a company as constituting control while others may consider 50 per cent or more. The World Bank considers 10 per cent of the voting stock as a basis for determining management control, and defines FDI as "the sum of equity capital, reinvested earnings, other long term capital and other short term capital as shown in the balance of payments".
FDI can also take the form of intra-firm loans, portfolio flows, and reinvested earnings, which are all poorly recorded and do not necessarily correspond to any act of physical investment. Moreover, account needs to be taken of the fact that, to the extent that FDI involves purchasing ownership in the case of privatizations or mergers and acquisitions, this does not lead to an immediate increase in capital accumulation.
Portfolio Flows
Developed country institutional investors (pension funds, insurance companies, and mutual funds) have over the years become key actors in the world's capital markets. The combined assets of all the pension funds, insurance companies and mutual funds of the seven major industrial countries were estimated at close to US$ 17 trillion in 1994, having risen from US$ 5 trillion in 1985. These assets exceed the capitalization of equity markets in developing countries by a factor of 17:1, and they exceed the 1995 GNP of the low and middle income developing countries by a factor of 3.5:1.
The assets of mutual funds, which have become the most popular means for portfolio investment by relatively small investors, have risen at the expense of commercial bank deposits for almost two decades. The share of household savings channelled to mutual funds in Japan, the UK and the US, doubled between 1975 and 1994, and this trend has accelerated in recent years. In 1993 alone, US mutual funds had inflows of US$ 250 billion, the largest annual increase ever, raising the share of institutional investors in all financial assets to 52 per cent, compared to 32 per cent in 1978. Similar trends could be observed in other leading industrial countries.
In 1995, some 10 per cent of their portfolios consisted of overseas investments, mostly high grade bonds and foreign currencies. During the 1990s large institutional investors became prominent purchasers of bonds and equities in a few developing countries, which came to be referred to as the emerging markets, in search of higher and quick returns and to diversify their portfolios.
Factors on both the demand and supply side contributed to the rise in inflows of portfolio investment into developing countries. An important factor that increased the supply of funds for overseas portfolio investment was the liberalization of capital markets in industrial countries. All industrial countries had removed exchange controls by the end of the 1980s and moved towards complete capital account convertibility only in the 1970s and 1980s. France and Italy introduced capital account convertibility only in 1990. Of particular significance was the relaxation of regulations governing the holding of foreign assets by U.S. pension funds. Changes in government regulations and in the provision of tax benefits encouraged increases in pension fund contributions by both individuals and companies.
The decline in interest rates in the industrial countries was another major factor contributing to the rise in the supply of funds for portfolio investment. Interest rates in the United States have been at a thirty-year low, in Germany, they have been lowest since the war, while in Japan, such low rates have not been witnessed over the past century.
On the demand or "pull" side, domestic capital markets in a number of developing countries opened up to foreign investment as part of the process of deregulation and capital account liberalization, making it easier for capital to move in and out of countries. Capital markets of countries with strong economic growth and rapidly rising export earnings were, of course, particularly attractive to foreign investors. The fact that many developing countries maintained interest rates on bank deposits in foreign currencies at significantly higher levels than those offered in industrial countries was, despite the obvious risks, another attraction for foreign capital.
Portfolio diversification through investment in developing countries appeared particularly attractive because the available evidence suggested that while stock markets of the industrial countries tended to rise or fall together, no such relationship seemed to exist with respect to the movements in developing country markets, a reflection of the fact that there were few portfolio investments by outside investors.
Nevertheless, portfolio investment in developing countries was still considered marginal and relatively risky and it accounted for only a modest share (perhaps, 1 or 2 per cent) of the assets of institutional investors. The recent financial and economic crisis affecting East Asian countries and the contagion effect showed the high potential of portfolio investment and currency speculation to wreak havoc upon the economies of recipient developing countries. Emerging markets as a whole are currently considered overly risky by overseas portfolio investors.
As mentioned earlier, in order to address developing countries' problems regarding the financing of their development, there is a need to consider a broader range of matters than the external flows intended for development, in particular the issue of external debt and that of commodity prices and the terms of trade.
External debt
A considerable number of developing countries have a large external debt which they are finding difficult or impossible to service. Many of these heavily indebted countries are least developed countries, with very low levels of income per capita.13
The rising debt reflects a large accumulation of debt arrears, involving an accumulation of principal in arrears and of capitalized interest. The greater part of the long term debt of the very many developing countries with arrears in debt servicing is owed to official bilateral and multilateral creditors, and particularly to multilateral creditors.14 The high ratios of nominal debt stock to actual and likely annual export earnings means that in effect the debt of most countries will be impossible ever to repay.
External debt indicators exhibit wide differences across regions. Thus, while in 1997 the ratio of external debt to exports was just over 100 per cent in the East Asia and Pacific region, it was roughly twice as much in Africa and Latin America. (Table 6.) Although there was a large increase in the ratio of the external debt to export earnings (in some cases more than doubling) between 1980 and 1990, there has generally occurred some improvement during the 1990s.
The decrease in the ratio between 1990 and 1997 for Latin America was much larger than the decrease for Africa, implying that debt burden continues to be a particularly serious problem for Africa. In Asia, however, the current financial and economic crisis will have increased external indebtedness in the most recent years.
Short-term debt as a proportion of the total debt (Table 6), which is another indicator of debtor countries' vulnerability, shows relative stability over time, except in the case of the East Asia and Pacific region.
It is debt service ratios, however, which give some indication of the debt burden of developing countries. A heavy external debt burden undermines the efforts of particularly the poorest countries to increase the level of capital accumulation, prevents the improvement of infrastructure and reduces the level of expenditure on health and education, all of which prejudice future growth and development. Nominal debt service burdens may be many times the level of a debtor's export earnings but even actual debt service payments indicate the major drain on national resources.(Table 7.) Regional aggregates, however, mask a wide variation in particular country situations. In the case of Africa, the actual debt service payments of many countries range between 20 and 60 per cent of all official foreign exchange receipts.
Commodity prices
Developing countries' ability to finance their development has been seriously affected by the huge loss of foreign exchange earnings they have incurred due to the sharp and continuing fall in the real prices of primary commodities since the early 1980s.
Right through the 1980s, commodity prices fell on average by 5 per cent annually in real terms. By 1990 they were 45 per cent below their 1980 level. In fact they had fallen by then to 10 per cent below the 1932 level -- the lowest reached in the Great Depression of the 1930s. Between 1980 and 1991, the developing countries suffered an estimated cumulative loss in total export earnings in real terms of US$ 290 billion, an annual average loss of US$ 25 billion.
Nominal commodity prices continued to decline until mid-1993; as from then until mid-1994 there was an unexpected rise of some 20 per cent and by late 1994 nominal commodity prices had recovered to almost 75 per cent of the 1980 level, but in real terms commodity prices were little higher than 50 per cent of the 1980 level. This recent upswing was relatively modest when viewed against the magnitude of the collapse of the early 1980s. The situation has worsened dramatically in the last couple of years following the Asia financial crisis and sharp economic downturn. The commodity situation threatens to remain critical for developing countries, not only for low income countries but also for middle income countries, particularly as world growth levels have been revised downwards in the wake of widespread financial crises.
Developed countries, in the meantime, have reaped considerable benefits from the continuing decline in the price of their primary commodity imports from developing producing countries.15
This brief overview depicts significant changes in the composition, quantity, quality and distribution of financial flows to the South.
Public flows have not kept up with the needs for this type of external financing. They have in fact diminished in quantity and quality. The private flows which have emerged have considerably different motivations from those underpinning the provision of ODA, and do not necessarily serve the extensive development needs in the South. Moreover, they are more unpredictable than public flows and highly volatile. Often associated with increased integration into the world economy and with increasingly open financial markets, they have become the source of instability and crisis in many countries
Both public and private flows in their different ways impinge considerably on developing countries' decision-making and sovereignty. The conditionalities of the multilateral financial institutions and bilateral donors, and the preferences and strictures of investors and the market, exert a powerful influence on social and economic policy choices and on the political framework. The pervasiveness of Northern influence is such that many developing countries sense a loss of control over their own destinies.
The serious problems faced by many developing countries with respect to their debt servicing burden and the declining trend of commodity prices increase their need for financial inflows to facilitate servicing the debt and closing the trade gap.
Some of the development implications of these finance-related factors are discussed briefly in the next section.
6 The data on ODA are provided by donor countries to the OECD which processes the information and publishes the Development Co-operation Report. OECD's data can not be reconciled with the information from the balance of payments of the recipients, because much of the ODA never leaves the North, involving, as it does, transactions within the donor countries.
7 Net resource flows comprise gross capital flows, minus principal repayments and minus interest payments.
8 The bulk of FDI which goes to China is from the rest of Asia, particularly from the Chinese in Hong Kong and Taiwan. Some of this is capital "re-routed" from China to take advantage of certain tax benefits extended to foreign investors. Some of this investment by overseas Chinese may also have come from outside the region.
9 Note that "other official flows", that is, export credits extended by independent governmental institutions, the purchase of bonds of multilateral agencies, in combination with ODA, constitute "official development finance".
10 There are 22 countries in Central and Eastern Europe and the former USSR (population 395 million) whose receipts of ODA and Official Aid (OA) combined were US$ 6.6 billion in 1993 and US$ 5.5 in 1997, that is, 12.5 per cent of combined ODA and OA in 1993, and 10 per cent in 1997. These countries fall into two separate OECD lists of countries eligible to receive official flows. The Part I list comprises developing countries and territories eligible to receive Official Development Assistance (ODA). The Part II list contains a small number of more advanced developing countries, some territories of donor countries and 12 Central and Eastern Europe Countries and Newly Independent States of the former Soviet Union (CEECs/NIS), which are eligible to receive Official Aid (OA). (The high income developing countries were Republic of Korea and Northern Marianes. In recent years, the flows to these countries were often negative.) The more advanced developing countries in the 1997 Part II list are Bahamas, Brunei, Taiwan (China), Cyprus, Israel, Kuwait, Qatar, Singapore, United Arab Emirates. However, there is an occasional shifting of countries from the Part I list to the Part II list. In 1997, the Part I list included 10 CEECs/NIS countries, and the Part II list included 12 such countries. In theory, the volume of aid flows to the economies in transition is determined separately from ODA but in practice both come out of the same declining aid budgets.
11 This point can be explained by the following example. If a country owes x amount in debt service but gets it written off, it receives no actual resource transfer, though the donor does forgo its claims and can show notionally x amount as resource transfer, offset by an equal amount in debt repayment, for domestic budgetary reasons.
12 The revised estimate of net ODA flows is closer to the actual financial transfers to the developing countries as reflected in their balance of payments accounts. The data provided by the OECD greatly exceed the data in the balance of payments of the recipients, simply because a good portion of ODA never leaves donor countries.
13 During the early 1990s, between 55 and 60 developing countries faced serious debt servicing difficulties, with arrears in excess of 20 per cent of scheduled debt service. Being in arrears on debt servicing obligations is a key indicator of the intensity of a developing country's debt burden: it is a clear sign that its debt service is beyond its capacity to pay. In 1992, among 58 countries with arrears exceeding 20 per cent of scheduled debt service, more than three quarters had arrears exceeding 50 per cent, half had arrears larger than 75 per cent, and more than a quarter had arrears in excess of 90 per cent. (See Non-Aligned Movement, The Continuing Debt Crisis of Developing Countries, Report of the Non-Aligned Movement Ad Hoc Advisory Group of Experts on Debt, 1994.)
14 The arrears on debt servicing is higher with respect to bilateral as compared with multilateral debt, due to the fact that debtors give precedence to servicing the debt of the multilateral creditors -- the so-called "preferred creditors" -- who have until recently shown themselves to be unwilling to countenance the rescheduling, reduction or forgiveness of developing countries' multilateral debt. Private external debt, owed to commercial banks, accounts for a relatively small proportion of the total because the banks earlier wrote off considerable amounts of debt assuming that they would never be paid. This was done with the help of funds from the IMF and World Bank and by converting the remaining debt into bonds which could be sold on the secondary market. The problem of private external debt has now resurfaced, this time in the East Asian economies in crisis, where the private sector received considerable foreign loans denominated in foreign currency which they had difficulty in repaying following depreciation of the local currency. Moreover, the IMF policies prescribed to deal with the economic crisis in these countries turned what was a liquidity crisis into a problem of solvency for large parts of the corporate sector.
15 This data on commodity prices is from South Centre, International Commodity Problems and Policies. The Key Issues for Developing Countries, South Centre, Geneva, 1996.