Hopeful Signs for Investment in Developing Countries

Migrant Workers Who Send Money Home Are a Key Factor

NEW YORK, APRIL 12, 2003 (Zenit.org).- Developing nations are reducing their reliance on new overseas loans and depending more on direct investment. Remittances by migrant workers are also becoming a key source of finance. These are some of the conclusions from the World Bank’s Global Development Finance report for 2003, released April 2.

The 1997-98 financial crisis in Asia continues to affect all developing nations. One consequence has been a decline in new private lending. The situation worsened in 2001 and 2002 because of the global economic difficulties.

Yet, the decline in new loans has a positive side. According to Philip Suttle, lead author of the report: “Over reliance on debt has been a problem for many countries. Looking ahead there is room for cautious optimism that capital flows to developing countries will be less volatile in the future. This would be good for growth and for poor people.”

According to the report, net private debt flows to developing countries, made up of bonds and bank loans, peaked at about $135 billion a year in 1995-96 and have since declined steadily, becoming net outflows in most years since 1998. Last year, developing countries paid $9 billion more on old debt than they received in new loans. This came on top of a 2001 outflow of almost $25 billion.

This means that even though net foreign direct investment has gone from a 1999 peak of $179 billion to $143 billion in 2002, it is increasingly the dominant source of external financing for developing countries.

The report identifies advantages in the increased reliance on investment, as opposed to debt. Investors tend to be more oriented to the long term and, compared to debt holders, are more inclined to tolerate short-term adversity. “The shift from debt to equity highlights the importance of developing countries’ efforts to foster a sound investment climate,” said Nicholas Stern, the World Bank’s chief economist and senior vice president for development economics.

The drawback with the debt repayments is that the developing world has become a net capital exporter to the developed world. As a result, capital is no longer flowing from high-income countries to economies that need it to sustain their progress toward development goals. This shortage, notes the report, is compounded in the poorest countries by a significant drop in official development assistance from bilateral donors.

According to the World Bank, the intense pressures to pay down external debt have placed many countries under severe stress in recent years, usually with particularly adverse consequences for poor people. There is now a growing consensus that the mechanisms available to cushion these debt pressures are in need of reform.

The plan to alleviate the debt burden of the poorest countries, known as the Heavily Indebted Poor Countries Initiative, has resulted in “significant progress,” observed the report. But continued weakness in the prices of commodities exported by these nations means that some of the countries will need still further help to reduce their debt.

Remittances to the rescue

Another notable development in recent years is the increase in remittances coming from migrant workers. The overall amount they sent home reached $80 billion in 2002, up from $60 billion in 1998.

The increase in remittances helps ensure greater financial stability compared to reliance on debt. The report observed that remittances tend to be countercyclical, since economic downturns encourage additional workers to emigrate while those already abroad tend to send more money to families left behind.

Remittances were particularly important for the Latin America and Caribbean region. In 2002 this area received $25 billion from migrant workers sending part of their paycheck back home. Mexico, the Dominican Republic, El Salvador, Colombia, Brazil and Ecuador are among the top-20 country recipients of remittance, with Mexico being only second to India. As a percentage of gross domestic product, remittances are largest in Central America.

Remittances were also important for the countries in South Asia, which received $16 billion last year. This is the second highest among developing regions and equals 2.5% of the GDP for the area.

Regional variations

Economic growth in developing countries was 3.1% in 2002, up by 0.3% on the 2001 performance. According to the World Bank, growth was restrained by the weakness in richer countries, and by financial and political uncertainties in several large emerging markets.

The report noted that growth in Latin America and the Caribbean was held down by the government debt default and banking collapse in Argentina. Other factors were the uncertainty about Brazilian elections, worsening conditions in Venezuela, and an associated falloff in financial market flows. GDP in the region dropped by 0.9% in the year.

In terms of regional trends in debt and investment, the Latin American and Caribbean region paid $9 billion more on old debt than what it received in new private loans. Foreign direct investment dropped to $42 billion, from $69 billion in 2001, the severest decline among all regions. But Brazil and Mexico were the second- and third-largest recipients of investment (after China) with $16.6 billion and $13.6 billion, respectively.

Overall, the report expects growth in Latin America and the Caribbean to accelerate by the most of any region in 2003, led by a recovery of Argentina. Regionwide GDP is expected to grow 1.7% this year and 3.8% in 2004.

The situation in South Asia is healthier. The report notes that South Asia’s GDP rose 4.9% in 2002, and is expected to rise by 5.3% this year. The report is also forecasting a rise in foreign direct investment from $5 billion in 2002 to $9 billion in 2005.

In East Asia and the Pacific, foreign direct investment rose to $57 billion in 2002, up from $48.9 billion in 2001. The increase was largely due to the continuing rise in investment in China. In 2002, China became the largest foreign direct investment recipient, surpassing the United States for the first time, by attracting a record high of $52.7 billion. This amount accounted for 37% of the developing countries’ total in 2002.

In the Middle East and North Africa region, capital flows are traditionally much more modest. In recent years foreign direct investment has been around $2 billion to $3 billion a year. The report noted that the region has the lowest returns on investment in the world. This factor, combined with prewar uncertainty over Iraq and the continuing Israeli/Palestinian conflict, has eroded investor confidence and posed obstacles to investment.

Regarding the role of developed countries, the report said that they could support development most directly “through coherent aid and trade policies that promote development.” The report particularly called on industrial countries to reduce agricultural subsidies and trade barriers that discriminate against exports from developing countries.

Regarding aid to developing countries, the report pointed out that the commitment to increase assistance made prior to the U.N. Conference on Financing for Development, in Mexico in March 2002, was a welcome contrast to previous cuts. However, the amounts promised are insufficient to reach the development goals set for 2015. One can only hope that the richer countries will not be too distracted by their own problems to forget the plight of developing nations.

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