Sources for financing domestic capital — is foreign saving a viable option for developing countries?

Sources for financing domestic capital — is foreign saving a viable option for developing countries?

Published Jan 2004

Authors

J. Aizenman, B. Pinto, A. Radziwill

Publisher

Focus themes

Focus regions

Open full report
Most of the developing countries’ capital stock is self-financed.

What are the sources for financing the domestic capital stock? To what degree is the domestic capital stock self-financed?

This study proposes a new method for evaluating the net sources for financing the domestic stock of capital and measuring the degree to which the domestic capital stock is self- financed. The authors use the national accounts to construct self-financing ratios, indicating what would have been the autarky stock of tangible capital supported by actual past domestic saving, relative to the actual stock of capital. The paper also demonstrates the usefulness of the proposed method by evaluating the actual patterns of financing the capital stock of developing countries in the 1990s.

Major findings are:

  • on average, 90% of the stock of capital in developing countries is self financed, and this fraction is stable throughout the 1990s, a period characterized by a rapid increase in gross capital flows otherwise
  • Latin America's dependence on domestic saving is rapidly decreasing
  • the greater integration of financial markets has not changed the dispersion of self-financing rates
  • the changes in de-facto financial integration and the changes in self- financing are not correlated
  • there is no evidence of any 'growth bonus' associated with increasing the financing share of foreign savings
  • throughout the 1990s, countries with higher self-financing ratios grew significantly faster than countries with low self-financing ratios even after controlling growth for the quality of institutions
  • higher volatility of the self-financing ratios is associated with lower growth rates
  • better institutions are associated with lower volatility of the self-financing ratios<\UL>

    The findings of the study are consistent with the notion that financial integration may have facilitated diversification of assets and liabilities, but it has failed to offer new net sources of financing capital in developing countries.

Related content

  • Document

    COVID-19 Impacts Cross Border Traders in East Africa

    J. Klopp, A. Krueger, M. Trimble / Global Integrity Anti-Corruption Evidence (GI-ACE), 2020
     Highlights the implications of COVID-19 on small scale cross-border trading in Kenya and Uganda. They find that Kenya-Uganda border restrictions are also reducing the work of informal border traders. This will have a knock on effect on the Ugandan economy, where informal trade accounts for 25-40% of intra-regional trade.
  • Document

    At the table, off the menu? Assessing the participation of lower-income countries in global tax negotiations

    R. Corlin Christensen, M. Hearson, T. Randriamanalina / Institute of Development Studies UK, 2020
    For half a century, the most influential international rules and standards for taxing multinational corporations have been formulated by a select group of developed countries, the OECD, with lower-income countries on the outside. Since 2013, this has changed: decision making at the OECD has moved to the ‘Inclusive Framework’ (IF), which today encompasses 137 jurisdictions.
  • Document

    Economic transformation in Vietnam

    United Nations University World Institute for Development Economics Research, 2020
    During the last three decades Vietnam has undergone a considerable economic transformation. However, little research has considered the role that financial reform has played in the development of small and medium size enterprises (SMEs).
  • Document

    COVID-19 and the African energy sector: Energy insight

    W. Shen, S. Ayele / Oxford Policy Management, 2020
    As elsewhere in the world, COVID-19 continues to ravage Africa, causing thousands of deaths and an unprecedented health crisis that is damaging to every aspect of the social and economic lives of millions of people.
  • Document

    Africa trade and Covid‑19: The supply chain dimension

    K. Banga / Overseas Development Institute, 2020
    The global Covid-19 pandemic has had an enormous impact on trade across the world. Value chains and trade have slowed down, or even been brought to a halt, via several channels:
More like this