The role of capital mobility in the developing economies' growth

Summary Private capital flows to developing countries¡Xmainly foreign direct investment and portfolio investment¡Xas measured by net long-term resources flows, increased dramatically in the 1990s, from $ 62 billion in 1991 to almost $ 226 billion in 2000, dropping to $ 160 billion in 2001. On the other hand the overall economic growth in the developing countries declined in the same decade ¡§1990s¡¨ and poverty has been rising. That what the Wold Bank reported in the most recent data collection (World Development Indicators 2002), where the world is experiencing every term of time new emerging economy in a favour of efficiency implementation to the foreign capital flows. Globalization is still leading the integration in the international economy, there is a free capital mobility preference among the investors and the countries of investment projects. There is a common belief that financial flows and capital movement can contribute to growth and poverty reduction, but how? That has been the major debate for a long time. This paper is mainly deals with finding reasonable economic suggests and results to the best way for the developing countries to use the foreign capital inflows efficiently, and what is the ideal situation to achieve growth in these developing countries from the movement of international capital to their economies? All that upon empirical investigation to real recent statistical observations. The paper contains illustration to the previous economical work in the theoretical foundation to the role of capital mobility in causing economic growth in the developing countries. The capital movement used to take three types, that which follows foreign direct investment (FDI) and private capital flows (PCF), beside the multilateral and economical groups and agglomerations¡¦ lending and aid contribution. The survey of the previous literature includes some examples of what written in each type of capital mobility, trying to present sufficient review covering the entire capital mobility effect in the growth of the host developing countries. The analysis in this paper used the model of (Borensztein, De Gregorio and Wha-Lee 1995) who succeed to found an expression the growth (g) with human capital (H) and other variables: g = 1ƒ}ƒã ƒËƒé F (n* , Nƒ}N* )-1 H ¡V ƒâ ]. And who analogy that in an econometrical approximation equation as follows: g ƒ­ Cƒ~ ƒy Cƒ¡ FDI ƒy Cƒ¢ FDI. H + Cƒ£ H ƒy Cƒ¤ Yƒ~ ƒy C6 X The analysis also due to many other efforts which used almost the same components of this model, but with different technique, like Edwards (2001) and others. The data that used in this paper is covered 90 developing countries from the different regions of world, during the recent last two decades (1980s and 1990s). The data was inserted in Minitab software (release 13) to create many regressions, the main equation of the regressions is: g = C0 + C1 FDI + C2 FDI. H + C4 H + C5 PCF + C6 Priv. Dom. + C7 G.E. Where Priv. Dom. is private domestic investment and G.E. denotes government expenditure. Aid per capita was inserted to present the role of multilateral role. The domestic investment was introduced to present the domestic investment role and quality. The main control variables of the above equation were found significant, which indicate that they effecting the dependant variable ¡§the growth¡¨. The results of the paper suggest that, there is a complementary between foreign capital flows and the stock of human capital in the host developing country. That demonstrates, only developing countries, which are rich with human capital, can compete well to attract and perform the foreign capital efficiency. While the developing countries which are poor in human capital could not achieve growth from the foreign capital inflows, and even that might hurts the domestic economy in weaken the domestic product market and the other bad consequences. The results also found the role of financial intermediation ¡§from the test of Priv. Dom. and PCF predicted variables¡¨ is important to ensure that the foreign capital inflows could foster economic growth in the host developing countries. That shows the importance of well built financial intermediation in translating the foreign capital flows to profitable developing projects. The weak financial intermediations always fail in using the foreign capital flows and even in presenting profitable developing projects which could attract that international capital, the worse thing that if the capital flows happened might hurts the economy and crowd out the domestic investment. The analysis used control variable presenting the role of multilateral aid and programme in causing economic growth, and the interaction between it and the government expenditure was found significant. That illustrates how the poor developing countries are urgently need help to fund the building of society institutions and to finance the investment in infrastructure at least until they reached a target level from human capital? Before the multilateral companies can use the normal lending programme and treat them without any exceptions and expecting interests and dividends payments