Recovery, Insolvency and Stagnation: The Flow of Foreign Capital to Developing Economies in Historical Perspective

The last two decades of the twentieth century have witnessed several episodes of balance of payments crisis in developing countries (DCs), starting from a Polish moratorium on foreign debt in 1981 up to financial distress and currency devaluations in Eastern Asia and Russia in 1997–8; in between, Latin American and African economies have also heavily suffered from external crises. Nonetheless, an unprecedented amount of capital inflows reached developing countries (including the transition countries in Europe and Asia) in the 1990s, exposing the recipient economies to old problems and new challenges. As stated in Chapter 1, this volume does not deal with various short- and medium-term concerns associated with capital movements in developing economies, focusing rather on the relationship with long-run growth; however, it would be difficult not to mention some of the themes related to the financial strains of the end of the century in a work on capital movements in DCs. In this chapter we confine ourselves to only a few topics that are functional to some of the arguments of Parts II and III: in particular, this chapter provides a stylised description of the cyclical pattern of capital inflows to developing countries (Section 2.1), an account of historical trends especially centred on the twentieth century (Section 2.2) and finally a brief review of some academic and policy-oriented debates triggered by the surge in capital flows of the 1990s (Section 2.3). Readers interested in a more complete treatment of these topics can find extensive reference to the recent contributions in these fields.