"Recent commentary has suggested that capital inflows – long considered a positive for growth – may actually be doing more harm than good. This column presents new evidence reinforcing the conventional interpretation. It finds that volatility is the determining factor. With volatility below a threshold, an inflow of foreign capital promotes growth. But during periods of volatile growth, the effect is opposite.
In a recent survey, Kose et al (2006) find little robust evidence for long-run growth benefits from global capital inflows. Prasad et al (2006) go a step further. They argue that developing countries grow faster when they rely less on foreign capital, as suggested by a positive relationship between current-account surpluses (capital outflows) and average growth (Figure 1). The conclusion then is that international capital may even hurt economic growth in poor countries.1 This proposition has now acquired the status of a ‘stylised fact’ and is the cornerstone of a growing theoretical literature (eg Gourinchas and Jeanne 2007)..."
In a recent survey, Kose et al (2006) find little robust evidence for long-run growth benefits from global capital inflows. Prasad et al (2006) go a step further. They argue that developing countries grow faster when they rely less on foreign capital, as suggested by a positive relationship between current-account surpluses (capital outflows) and average growth (Figure 1). The conclusion then is that international capital may even hurt economic growth in poor countries.1 This proposition has now acquired the status of a ‘stylised fact’ and is the cornerstone of a growing theoretical literature (eg Gourinchas and Jeanne 2007)..."
