Foreign Capital and Asian Economic Growth

The role of foreign capital in economic growth is controversial. Neither the theoretical arguments nor empirical evidence is clear-cut or conclusive. In the early 1960s a group of economists had argued that foreign capital inflows invariably had a favorable effect on economic efficiency and growth. In the early 1970s the assumptions and findings of this group were challenged by the “displacement theorists†who argued that foreign capital could be immiserizing. Recent developments and experiences in Asian developing countries have warranted a further consideration of this issue. First, the recent accumulation of external debt in these countries is emerging as a potential constraint on economic development. Second, the rapid increase of intraregional investment in Asia in recent years has renewed interest on the contribution of foreign inflows to economic growth. Third, the external debt crisis has made the transition for developing countries from recipients of aid to market-oriented private flows more difficult as access to voluntary private financing has been curtailed, and official aid, from both multilateral and bilateral sources, is once again becoming the major element in the transfer of foreign resources to developing countries…