Private capital flows to low‐income countries: The role of domestic financial sector

Abstract

The relationship between private capital flows and growth has been examined extensively in the literature, yet numerous controversies still remain. The study examines the relationships among private capital flows (foreign direct investment, portfolio investment and foreign debt), financial development and economic performance in a sample of 16 low‐income developing countries over the period 1988–2006, by employing generalized method of moments (GMM) panel data analysis. We find that private capital flows have a positive impact on growth in low‐income countries with well‐developed financial sector but have a negative effect in the presence of poor financial sector development. Well‐developed financial sectors are ones that are themselves crucial for economic growth. Our results indicate that private capital flows would be more effective if they were more systematically conditional on well‐developed financial systems. Santrauka Ryšys tarp kapitalo srautu ir ju augimo yra intensyviai tiriamas. Pastebeta, kad daug prieštaravimu tarpju vis dar išlieka. Šiame tyrime nagrinejamas santykis tarp privataus kapitalo srautu (ieinančiu užsienioinvesticiju, portfeliniu investiciju ir užsienio skolu) finansines pletros ir ekonomines veiklos pasirinktosešešiolikoje mažas pajamas gaunančiu besivystančiu šaliu 1988–2006 m., duomenu analizei taikantapibendrinamaji momentu metoda (GMM). Nustatyta kad privataus kapitalo srautai turi teigiama itakaaugimui mažas pajamas turinčiose šalyse su gerai išpletotu finansiniu sektoriumi, tačiau daro neigiamapoveiki toms šalims, kuriu finansinis sektorius yra skurdus. Gerai išvystyti ekonominiai sektoriai yratie, kurie vaidina lemiama vaidmeni ekonominiam augimui. Rezultatai parode, kad privataus kapitalosrautai būtu efektyvesni, jei jie sistemiškiau priklausytu nuo gerai išsivysčiusiu finansiniu sistemu. First Published Online: 10 Feb 2011 Reikšminiai žodžiai: privataus kapitalo srautai, akciju rinka, augimas, duomenu analize

Keywords

• private capital flows
• stock market
• growth
• panel data analysis