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Prospects Weekly: Capital flows to developing countries rebounded stongly in 2010

Global Macroeconomics Team's picture

Although capital flows to developing countries were up 45 % in 2010, most of the increase was concentrated in a few middle-income countries. Flows to developing Europe and Central Asia remain sharply compressed.  Developing countries continue to grow as a source of FDI to both high-income and other developing nations. Importantly, the recovery in developing country GDP has reflected growing domestic demand and occurred despite weak import demand from high-income countries.
Capital flows to developing countries rebounded strongly in 2010, but remain well below their 2007 peaks – especially as a percent of developing-country GDP. Total net capital flows to low and middle-income countries in 2010 amounted to $510 billion—up 45% from the $353 billion registered in 2009, but still almost 50 percent lower than the $1.1 trillion received in 2007. As a percent of developing country GDP, the increase was less striking, from 3.7 percent of GDP in 2009 to 4.4 percent in 2010, versus 8 percent in 2007. The rebound was concentrated among a few economies (Brazil, China, India, Indonesia, Malaysia, Mexico, South Africa, Thailand and Turkey). These countries saw flows rebound from 3.2 to 4.3 percent of their GDP. Flows elsewhere also rebounded in value terms, but less strongly, from $167 billion to an estimated $230 billion in 2010. Although flows to developing Europe and Central Asia picked-up in 2010, at 3.5 percent of GDP they remain sharply depressed compared with their pre-crisis levels of 14 percent of GDP.
Developing countries are a growing source of FDI inflows to other developing countries. FDI inflows emanating from developing countries reached 34% of all FDI received by developing countries in 2010, up from 28% in 2004. FDI originating in developing countries now represents an estimated 13% of the FDI received by high-income countries, versus 8% in 2004. Developing countries have also come to represent a key source of funding for high-income sovereigns. For instance, as of late 2010 developing countries held over a third of all outstanding US government securities, although this share was down somewhat from their 40 percent share in late 2009. China was responsible for over 60% of this total.

The economic recovery in developing countries mainly reflected a rebound in their own demand levels.  Outside of developing Europe and Central Asia, most developing countries have recovered or are close to closing output gaps and are growing at close to pre-crisis rates. This is a remarkable achievement particularly as the recovery in high-income countries has been weak. The upturn in developing economies mainly reflects a rebound in their own domestic demand. Their exports remain some 7% below pre-crisis trends. In contrast, strong demand in developing countries has contributed to the recovery in high-income countries, with developing country imports some 8% higher than pre-crisis trends. Overall developing countries were responsible for almost half of global growth in 2010.

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