SUMMARY
Abstract: In the wake of the recent financial crisis in Asia there has been a renewed interest, and much debate, in academic and policy-making circles alike on the structure and working of the international financial system. While the issues raised in this debate are by no means irrelevant to the low-income countries in sub-Saharan Africa and South Asia, they do not deal with the most critical development problem that these countries face, namely, the increasing scarcity of development finance, especially long-term development finance. The marginalization of these regions in the global debate on the international financial architecture is as much a reflection of their marginalization in the real world of global trade and finance as it is of the complacency to which the seeming triumph of "market forces" has given rise. But although they are largely marginalized in global trade and finance, these countries are not spared the effects of an international financial crisis. They pay for it in reduced growth, in terms of trade losses and in reduced capital flows. The 1990s have indeed witnessed a phenomenal increase in the amount of private capital flows, especially FDI flows, going to the developing countries. These developments have helped fuel the belief that the market can be trusted to provide the financing that the poorer regions of the world need for their development. However, a closer examination shows that the situation is not quite as sanguine as the general trends might suggest. What is evident is that these large private flows are highly concentrated in a few developing countries. A handful of middle-income countries, mainly in East Asia, account for the bulk of all capital market financing. Even the increase in capital market flows to low-income countries in recent times has been highly concentrated, with the bulk of it going to India alone. The picture is much the same for FDI flows, with close to three quarters of these flows going to about ten middle-income countries in the period 1992-1998, while the oil and mineral exporting countries account largely for the flows going to the low-income countries. For the vast majority of developing countries and for the low-income countries in particular, official development assistance remains the most significant source of external finance. Yet these official flows have been falling in recent times and all indications are that we are unlikely to see a return to the peak years, although the policy environment in most of these countries is much better than it has been in more than two decades. At the same time, although many low-income countries, including a good number in sub-Saharan Africa, have begun to improve domestic resource mobilization efforts, with impressive results in some cases, domestic resource mobilization cannot realistically be expected to yield anything approaching the level of resources required to sustain, let alone accelerate, the recently improved rates of growth in these countries. These low-income countries also face well-known and long-standing protectionist barriers in developed country markets in their attempts at export diversification, especially into clothing and textile exports, and are, moreover, burdened by unsustainable levels of external debt and debt servicing ratios that not only dampen the enthusiasm of foreign investors but also preempt vital social and economic investments. The low-income countries bear much of the responsibility for reversing these trends by pursuing policies that boost growth, enhance competitiveness and help the repatriation of flight capital. Concerted international action is required to improve the effectiveness of aid in these countries but, more importantly, to expand their participation in international trade as well as improve their access to private capital. Debt relief involving a total write-off of outstanding debt for countries undertaking credible efforts at economic reform, along with increased aid flows, would help provide significant fresh resources for domestic investment, especially in the social sectors, and also improve the outlook for foreign investment. In addition, international action would need to focus on creative new mechanisms for mobilizing and channelling long-term capital to the low-income countries. Sub-Saharan Africa must occupy a special place in these efforts by reason of the enormity and complexity of its development challenges
