Global Finance and Development

With current flows of private finance reaching out the developing areas, our analysis would remain incomplete in the absence of a close look at their impact on development. The pattern of financial flows to these countries was drastically changed by the early 1970s, as concessional loans from official sources started tapering off and were substituted by flows of bank credit from private sources. Unlike the official loans which used to be distributed relatively evenly across countries, the flow of private credit was directed primarily to a handful of middle-income countries in Asia and Latin America. As we have pointed out in Chapter 2, by the early 1970s, international banks in the West were already facing a dampened credit demand in home countries. Flushed with liquidity which augmented further with large OPEC deposits from the oil-rich Arab countries, banks in the West thus had to seek out borrowers from outside, if they were to remain in business. The middle-income developing countries, in turn, used the opportunity to avail of the credit which was cheap in terms of the low or even negative real interest rates at which these were offered. While these borrowings were mostly publicly guaranteed, the proceeds often added to private wealth, contributing little, if at all, towards national benefit in terms of growth and employment in these countries.