CAPITAL FLOWS TO DEVELOPING-COUNTRIES - IMPLICATIONS FROM THE ECONOMIES IN TRANSITION

Are capital flows to developing countries likely to be affected by new demands from Eastern Europe and the former U.S.S.R.? The paper discusses capital flows from private and official sources and concludes that there is little reason for concern about capital flows from the private sector. Few developing countries currently have access to these flows, and the economies in transition are unlikely to attract large-scale private flows during the next few years. In fact, developments in other parts of the world are more likely to influence global capital markets than developments in Eastern Europe. In terms of official finance, and especially official development assistance, there may be reason for concern, however. Empirical analysis of past experience suggests that large sustained increases in aid to selected countries tended to divert substantial flows from other developing countries. Of course, the current situation is unique: alternative scenarios are possible in which official assistance to Eastern Europe need not divert aid from developing countries.