Mobilizing International Resources for Development: Foreign Direct Investment and Private Flows

1. Mobilizing international resources for development: Foreign direct investment and other private flows Mansoor Dailami Manager, International Finance, Development Prospects Group, World Bank New York February 15th, 2008

2. Summary and key issues • Private capital flows to developing countries have been on a strong upward trend, supported by domestic economic reforms and high growth • FDI continues to be the largest and most stable capital flow with increasing focus on services • Private capital flows expected to decline somewhat in the short term amid more moderateglobal growth and tighter credit conditions

3. Private flows have gone through pronounced cycles against an upward trend Net private capital flows to developing countries, 1970-2007 $ billions Percent $998 billion in 2007(7.3% of GDP) Percent of GDP (right axis) $6.5 billion in 1970(1.0% of GDP)

4. … dominated by cycles in international bank lending… Net private debt flows to developing countries , 1970-2007 Percent Bank loans Bonds

5. ..with the corporate sector playing an increasingly important role in debt flows Gross debt flows to developing countries, 1991-2007 $ billions Source: World Bank Debt Reporting System and staff estimates.

6. …and FDI accounting for about one-half of total private flows $ billions 37% 12% 42% 50% 11% 47%

7. …supported by strong growth in developing countries Real GDP, percent change Developing economies 7.2% High-income 2.7% Source: World Bank.

8. …and improved external payments positions --current account surpluses in many countries Current account balance of developing countries $ billions Percent $408 billion in 2007 Percent of GDP (right axis)

9. ..along with large-scale foreign exchange reserve holdings… Foreign exchange reserves Increase in foreign exchange reserves $billions $3.6 trillion $2.0 trillion $0.9 trillion * World Bank staff estimates

10. …improved external financial policy… • Many developing countries have moved to managed or free floating exchange rate regimes Mexico(1994), Indonesia(1997), Colombia(1999), Brazil(1999), Chile(1999), and Russian Federation(2002)... • Capital controls have been eased Brazil, Chile, Hungary, Romania, and Slovak Republic... • Some have adopted inflation targeting Brazil, Chile, Colombia, Mexico, Peru, Philippines, South Africa, and Thailand...

11. …and better macroeconomic policies percent 1980s 2002-2004

12. Markets have recognized improved fundamentals in emerging markets -- priced in bond spreads Bond spreads (basis points) Emerging market bond spread (EMBIG)

13. Summary and key issues • Private capital flows to developing countries have been on a strong upward trend, supported by domestic economic reforms and high growth • FDI continues to be the largest and most stable capital flow with increasing focus on services • Private capital flows expected to decline somewhat in the short term amid more moderateglobal growth and tighter credit conditions

14. Growth in FDI flows driven by middle income countries… $ billions percent $456 billion (3.2 percent of GDP)in 2007 Percent of GDP Low-Income Countries Middle Income Countries * 2007 data is World Bank staff projection

15. …and highly concentrated in just a few large economies FDI inflows to developing countries $ billions China Top 5 countries account for 46 % in 2007 Russia Turkey Mexico Brazil Other Countries * 2007 data is World Bank staff projection

16. …but relative to GDP, FDI to low-income countries is on par with middle income countries FDI to GDP Ratio percentage * 2007 data is World Bank staff projection

17. China Equatorial Guinea Trinidad & Tobago Romania Azerbaijan Oman Chad Turkey Venezuela Gambia South Africa Bolivia Congo, Dem. Rep. Iran India Zimbabwe Central African Republic Malawi Rwanda FDI inflows are closely related to income per capita FDI per capita vs GDP per capita, 2001-06

18. And increasing focus on FDI in services, facilitated by technological change and liberalization Share in FDI Stock in 2005 percent Almost all services sector FDI is in infrastructure and financial sectors Manufacturing Primary Services

19. Low income countries still attract very limited private capital flows Net private capital flows to developing countries $ billions China Mexico 52 % Brazil Russia Poland India Middle Income 40% Low Income 8 %

20. Steady expansion in migrant remittance flows Migrant remittance flows Migrant remittance flows / GDP $ billions $200 billion Percent Low-income countries Middle-income countries Source: World Bank staff estimates.

21. Summary and key issues • Private capital flows to developing countries have been on a strong upward trend, supported by domestic economic reforms and high growth • FDI continues to be the largest and most stable capital flow with increasing focus on services • Private capital flows expected to decline somewhat in the short term amid more moderateglobal growth and tighter credit conditions

22. Global financial conditions have worsened noticeably • Moderate slowdown in global growth • Tighter credit conditions • Large losses in major financial institutions • More stringent credit standards * Impact of financial turmoil on emerging markets limited so far…

23. Private capital flows expected to ease… Net private capital flows to developing countries Projected 2008-09 $ billions Percent $998 billion in 2007(7.3% of GDP) Percent of GDP (right axis) 5.25% 3.5% of GDP average 1990-02

24. …but long-term prospects for increased capital flows remain positive • Developing countries’ favorable demographic profiles • About 84% of world Population reside in developing world • Scope for increasing investment and growth (Per capita investment $500 in 2006, compared to $6000 in developed countries ) • Less than 5% of global bonds issued in recent years originated in developing countries. • Further room for integration in the world economy