How important is sound domestic macroeconomics in attracting capital inflows to developing countries?
✍ Scribed by Graham Bird
- Publisher
- John Wiley and Sons
- Year
- 1999
- Tongue
- English
- Weight
- 201 KB
- Volume
- 11
- Category
- Article
- ISSN
- 0954-1748
No coin nor oath required. For personal study only.
✦ Synopsis
Many developing countries face de®ciencies of domestic saving and foreign exchange. With foreign aid declining in real terms it becomes increasingly important to ask what they can do to attract private capital. Without capital in¯ows, shortages of external ®nancing are likely to constitute an eective constraint on economic development. Within this context a key question is `how important is it to get the macroeconomics right?'. Can developing countries expect to be rewarded for improved macroeconomic performance by capital in¯ows? Clearly if they can, there is an additional incentive to seek such improvement.
The theoretical and empirical analysis in this paper suggests that there will be no short-run pay-o to improved macroeconomics, beyond a point at which severe macroeconomic disequilibria are eliminated. Whereas there are predictable penalties for getting the macroeconomics badly wrong, there are no equivalently predictable rewards getting it `right'. In large measure this is the consequence of the ambiguities surrounding what is sound macroeconomics. Macroeconomics is simply too uncertain to encourage investors to attach deterministic weights to indicators of macroeconomic policy and performance. For as long as these uncertainties remain, it is dicult to see how domestic macroeconomics will become a dominant factor in explaining capital ¯ows.