$2 leaving developing countries for every $1 going in – big new report on the state of global financial flows

December 18, 2014 13 By Duncan Green

A very useful new report from Eurodad, published today, provides ‘the most comprehensive review of the quantity of different financing sources available to developing finance cogscountries, and how they have changed over the past decade.’ This in the run up to the big UN summit on financing for development (FfD) in Addis Ababa in July 2015.

Here are some highlights from the exec sum:

‘We have analysed the best available data produced by international institutions, both from the point of view of developing countries as a whole, and for low-income (LICs), lower-middle-income (LMIC) and upper-middle-income countries (UMICs) separately. Unlike other recent analyses, we have not just examined the resources flowing into developing countries, but have also analysed the resources flowing out, identifying the lost resources.

We examine four very different categories of resources:

  • Domestic resources, including domestic investment and government revenue;
  • Lost resources, including illicit financial flows, profits taken out by foreign investors, interest payments on foreign debt and lending by developing countries to rich countries.
  • Inflows of external resources, including international public resources (aid and other official flows), for-profit private flows (foreign direct investment and portfolio investments in stocks and shares) and not-for-profit private flows (including charitable flows and remittances from migrant workers);
  • Debt creating flows, both public and private borrowing by developing countries.

 

One key finding of the report is that losses of financial resources by developing countries have been more than double the inflows of new financial resources since the financial crisis.

Lost resources have been close to or above 10% of GDP for developing countries as a whole since 2008. The main drivers of this are illicit financial flows, profits taken out by foreign investors and lending by developing countries to rich countries. [more on illicit flows, which are increasing much faster than global GDP, here]

infloes_losses_infographic

Our main findings for each category of resource are as follows:

Domestic resources: Domestic resources are far larger than all external financing sources for developing countries, with domestic investment reaching over 33% of GDP and government revenue over 18% in 2012. UMICs have reached $2,700 per capita domestic investment annually, while LICs manage only $165 per capita.

There are low levels of public investment in LICs – 3.5% of GDP in 2011, compared to over 9% in LMICs.

Losses of domestic resources.

  • Outflows of domestic resources represent major losses for developing countries, and have been running at double the inflows of new resources since 2008, as Figure 1 shows.
  • LICs are particularly badly affected, losing more than 17% of GDP in 2012.
  • The largest outflows were illicit financial flows ($634 billion in 2011) and profits repatriated by international investors ($486 billion in 2012).
  • In 2012, developing countries lent $276 billion to rich countries, and paid $188 billion in interest on external debts.
  • Since 2010, repatriated profits have exceeded new inflows of Foreign Direct Investment (FDI), with LICs particularly affected, with outflows of over 8% of GDP.

 

International public resources:

  • Country programmable aid (CPA) levels, while increasing in absolute terms to a high of $96 billion in 2011, have been falling relative to developing country GDP, which has been growing at a faster rate.
  • In LICs, however, aid remains an important resource, with CPA accounting for over 7% of GDP in 2012.

 

International for-profit private flows

  • FDI to developing countries was badly hit by the global crisis and remains below its 2008 peak. Rising GDP means it has fallen as a percentage of GDP from 3.2% in 2008 to 2.1% in 2012.
  • LICs, however, have had steadily increasing amounts of FDI compared to GDP, rising from 2.6% in 2003 to 5.1% in 2012, driven by a small number of countries.
  • For-profit flows can be highly volatile, particularly portfolio equity flows of stocks and shares, which rose sharply for developing countries before the global financial crisis drove them into negative figures in 2008.

 

International not-for-profit flows

  • Remittances from private emigrants to their families back home increased from just over $130 billion in 2003 to more than $350 billion in 2012, although this figure may be due to improvements in data collection.
  • Remittances are particularly important in LICS and LMICs; they represented 7% of GDP in LICs and 4.6% in LMICs in 2012. They are highly concentrated in a small number of countries.

 

Debt-creating flows

  • Since 2006, there has been a sharp increase in new debt taken on by developing countries, driven by LMICs and UMICs.
  • Developing country debt stocks reached their highest level ever in 2012 – $4.8 trillion, according to the World Bank – which was largely driven by increases in indebtedness by private actors.
  • LIC governments have remained heavy net borrowers throughout the period, averaging between 1.3% and 2% of GDP in additional long-term borrowing between 2003 and 2012.

 

And here’s the killer infographic gain_lose_infographic_twitter