1. Mobilizing international resources for development: Foreign direct investment and other private flows Mansoor Dailami New York February 15th, 2008 Manager, International Finance, Development Prospects Group, World Bank

2. Summary and key issues   Private capital flows to developing countries have been on a strong upward trend, supported by domestic economic reforms and high growth   FDI continues to be the largest and most stable capital flow with increasing focus on services   Private capital flows expected to decline somewhat in the short term amid more moderate global growth and tighter credit conditions

3. Private flows have gone through pronounced cycles against an upward trend $ billions Net private capital flows to developing countries, 1970-2007 Percent of GDP (right axis) Percent $998 billion in 2007 (7.3% of GDP) $6.5 billion in 1970 (1.0% of GDP)

4. … dominated by cycles in international bank lending… Percent Net private debt flows to developing countries, 1970-2007 Bonds Bank loans

5. $ billions Gross debt flows to developing countries, 1991-2007..with the corporate sector playing an increasingly important role in debt flows..with the corporate sector playing an increasingly important role in debt flows Source: World Bank Debt Reporting System and staff estimates.

6. $ billions …and FDI accounting for about one-half of total private flows 12% 37% 50% 42% 11% 47%

7. …supported by strong growth in developing countries Real GDP, percent change Source: World Bank. Developing economies High-income 7.2% 2.7%

8. …and improved external payments positions --current account surpluses in many countries $ billions Current account balance of developing countries Percent of GDP (right axis) Percent $408 billion in 2007

9. ..along with large-scale foreign exchange reserve holdings… $billions Foreign exchange reserves $3.6 trillion $2.0 trillion $0.9 trillion $billions20062007*China247431 Russia120169 Brazil3284 India3986 Malaysia1219 Algeria2233 Libya2021 Indonesia812 Increase in foreign exchange reserves * World Bank staff estimates

10. …improved external financial policy… Many developing countries have moved to managed or free floating exchange rate regimes Many developing countries have moved to managed or free floating exchange rate regimes Mexico(1994), Indonesia(1997), Colombia(1999), Brazil(1999), Chile(1999), and Russian Federation(2002)... Capital controls have been eased Capital controls have been eased Brazil, Chile, Hungary, Romania, and Slovak Republic... Some have adopted inflation targeting Some have adopted inflation targeting Brazil, Chile, Colombia, Mexico, Peru, Philippines, South Africa, and Thailand...

11. …and better macroeconomic policies percent 1980s 2002-2004

12. Markets have recognized improved fundamentals in emerging markets -- priced in bond spreads Bond spreads (basis points) Emerging market bond spread (EMBIG)

13. Summary and key issues   Private capital flows to developing countries have been on a strong upward trend, supported by domestic economic reforms and high growth   FDI continues to be the largest and most stable capital flow with increasing focus on services   Private capital flows expected to decline somewhat in the short term amid more moderate global growth and tighter credit conditions

14. Growth in FDI flows driven by middle income countries… $ billionspercent Percent of GDP Middle Income Countries Low-Income Countries $456 billion (3.2 percent of GDP) in 2007 * 2007 data is World Bank staff projection

15. $ billions FDI inflows to developing countries …and highly concentrated in just a few large economies Other Countries Russia China * 2007 data is World Bank staff projection Turkey Mexico Brazil Top 5 countries account for 46 % in 2007

16. percentage FDI to GDP Ratio …but relative to GDP, FDI to low-income countries is on par with middle income countries * 2007 data is World Bank staff projection

17. FDI inflows are closely related to income per capita FDI per capita vs GDP per capita, 2001-06 China Bolivia Gambia Azerbaijan Equatorial Guinea Zimbabwe Iran Venezuela Oman Chad Romania India South Africa Malawi Rwanda Central African Republic Turkey Congo, Dem. Rep. Trinidad & Tobago

18. percent Share in FDI Stock in 2005 And increasing focus on FDI in services, facilitated by technological change and liberalization Services Manufacturing Primary Almost all services sector FDI is in infrastructure and financial sectors

19. Low income countries still attract very limited private capital flows Russia China Mexico Brazil India Middle Income 40% Low Income 8 % 52 % Net private capital flows to developing countries Poland $ billions

20. Percent Migrant remittance flowsMigrant remittance flows / GDP Steady expansion in migrant remittance flows Low-income countries Middle-income countries $200 billion Source: World Bank staff estimates.

21. Summary and key issues   Private capital flows to developing countries have been on a strong upward trend, supported by domestic economic reforms and high growth   FDI continues to be the largest and most stable capital flow with increasing focus on services   Private capital flows expected to decline somewhat in the short term amid more moderate global growth and tighter credit conditions

22. Global financial conditions have worsened noticeably Moderate slowdown in global growth Tighter credit conditions  Large losses in major financial institutions  More stringent credit standards * Impact of financial turmoil on emerging markets limited so far…

23. Private capital flows expected to ease… $ billions Net private capital flows to developing countries Percent of GDP (right axis) Percent Projected 2008-09 $998 billion in 2007 (7.3% of GDP) 5.25% 3.5% of GDP average 1990-02

24. …but long-term prospects for increased capital flows remain positive Developing countries’ favorable demographic profiles Developing countries’ favorable demographic profiles  About 84% of world Population reside in developing world Scope for increasing investment and growth (Per capita investment $500 in 2006, compared to $6000 in developed countries ) Scope for increasing investment and growth (Per capita investment $500 in 2006, compared to $6000 in developed countries )  Less than 5% of global bonds issued in recent years originated in developing countries. Further room for integration in the world economy Further room for integration in the world economy