### 3. THE CHANGING PATTERN OF INTERNATIONAL CAPITAL FLOWS IN NIES AND ASEAN COUNTRIES

### 3.1 The Changing Pattern of the External Balance in Regional Countries

In order to finance the shortage of domestic savings caused by the increase in the funds demanded for industrialization, Asian countries increased the import of foreign capital during the late 1970's (see Figure 7) $ ^{21} $ . While all Asian countries had negative external balances (i.e. current account deficit) through the 1970's, in the 1980's the external balance of Taiwan and Korea changed to be positive and they started capital exporting, first in the form of short-term lending and direct investment. However, since ASEAN countries had continued to expand their foreign capital imports in the 1980's, the overall external balance of east and Southeast Asian countries was still negative until the mid 1980's. During the late 1980's the capital exports from Taiwan and Korea overwhelmed the increase in capital imports by ASEAN countries and an overall surplus of capital emerged in the region. The resulting capital exports from Asian countries started in the form of short-term capital, which was followed by long-term lending and portfolio investment. The import of direct foreign investment still exceeds its export and the transfer income accout is still positive.

### 3.2 The Capital Inflow from DAC Countries to Asian Countries

During the 1970's the long-term capital accounts of NIEs and ASEAN countries, excluding Hong Kong and Singapore, to DAC countries were always in surplus. However, the recent emergence of overall capital surplus in this region breaks the co-movement between the amount of capital inflow from DAC countries into the regional countries, and the overall external capital balance (see Figure 8). Before the mid 1980's these two moved together in the same direction, keeping almost the same proportions. Although the external balance increased rapidly and departed from the level of capital inflow from DAC countries during the two oil shocks of the 1970's, this reflected a temporary expansion of short-term borrowing from the international capital market in order to cover balance of payments crises.

In the 1970's all regional countries which had current account deficits could not afford to finance the shortage of capital of other member countries of this region, and thus, their major source of long-term capital was the imported capital from developed countries (see Figure 9). Since these regional countries did not have enough creditworthiness to import capital at the commercial base, a significant fraction of their imported foreign capital was official funds from DAC countries and long-term borrowing in the form of public debt. Therefore there was little chance of crossfinancing long-term capital (i.e. financing capital from amongst themselves).

Since the mid 1980's this correlation, between capital inflow from DAC countries and the external balance of these countries, has faded away and the gap between the two has gradually increased. Today, although long-term capital still inflows in net terms into these Asian countries from DAC countries, other regional capital surplus flows out mainly in the form of short-term capital. Currently, the sources of long-term capital exports to outside the region are the expanding current account surpluses of Taiwan and Korea. While these two countries export long-term capital to DAC countries, the gap between their total long-term capital exports and that to DAC countries has been increasing, which implies that a certain