International Capital Market and the Developing Countries

After the Second World War, down to the late 1960s, large parts of the financial resource flow to LDCs came from bilateral and multilateral sources. Capital market finances were limited to export credits and direct foreign investment. The domestic bias was still a norm in the early 1960s among English, French and US banks. Only a small number of them had international networks; the rest concentrated on their traditional home markets, passively responding to the needs of their corporate clients for trade finance and foreign exchange. In the late 1960s the scene started changing; the banks started becoming more international than national in response to a series of pressures: (1) economic stagnation at home; (2) the need to be competitive with foreign banks; and (3) the growing desire to increase the breadth of the banks’ funding base and reduce overall capital costs by tapping the international money market.1 From this time on, the international business of banks expanded unprecedently fast. This was accompanied by far-reaching changes in the structure of banking. This took place when the Euromarkets were poised for a take-off. The pace was spurred to a breakneck one due to the ‘telex banking’. The macroeconomic implications of these developments were: (1) the financial markets worked as an efficient mechanism for allocating world savings, including those of the newly affluent OPEC countries, to economically productive projects in the creditworthy countries, and (2) financial markets made an indispensable contribution in the recycling process and the financing of the deficits of many countries including LDCs.