countries in the sample represents more than twice the total volume of debt relief received by this group of countries. Thus, the growth and welfare returns from capital flight repatriation are clearly superior to expected gains under the stand alone HIPC relief, suggesting that a ‘big push’ in the form of massive reflows of capital could highly complement the HIPC initiative and enhance its success in recipient countries.<sup>9</sup>

# **II. Recent Developments in Capital Flows from and to Developing Countries**

Under the impulse of information and communication technology, the process of globalization has contributed to a dramatic increase in the speed and movements of capital at the global level [World Bank (2002, 2006), Fofack (2009)]. Although this surge in capital flows is a rebound following the 1997 East Asian financial crisis, it has been very strong and robust. In particular, since that rebound, capital flows to developing countries have grown unabated at least until the onset of the current global economic crisis.

Capital flows towards developing countries reached a new record high in 2005, a year that a World Bank report refers to as the “landmark year in global development finance” [World Bank (2006)]. According to this report, total net flows (from official and private sources) increased to US$472 billion in 2005. However, this statement must have been a brisk assessment because capital flows have grown in crescendo, and achieved an even more impressive level in 2006, when net flows to developing countries reached US$571 billion setting yet another record [World Bank (2007a)].

Nevertheless, the new threshold established in 2005 would have been even higher if the distributions of net official and private flows had not followed divergent paths. While net private capital flows continuously increased after the reversal to buoyancy in the financial markets following the global recovery from the Asian financial crisis, net official flows remained on a path of steady decline, taking on negative values in subsequent years, reflecting net capital outflow from developing countries.<sup>10</sup> The impressive rate of expansion of capital flows is therefore largely the result of net private flows [World Bank (2007a)]. This remarkable increase in net private capital flows particularly reflects the growing scope of foreign direct investment and globalization of financial flows [Kasekende (2001), Moran et al. (2005)]. It is argued that foreign direct investment is becoming an important contributor to economic growth, and that the benefits of financial globalization are increasingly felt in developing countries [IMF (2007), World Bank (2007a)].

While net equity inflows (portfolio and foreign direct investment) continue to account for the lion’s share of net private flows (over 60%), market-based flows from private creditors in the form of bonds or short-term debt are also growing quite rapidly, reflecting the maturation of financial markets and improvement of credit worthiness in a number of developing economies. Recent estimates suggest that capital inflows from market-based debt are growing even more rapidly than equity flows. Since 1998,

> 9 Indeed, in spite of access to debt relief under the Enhanced HIPC Initiative, debt sustainability indicators have been deteriorating rather rapidly in a number of post-Completion Point countries, a path which is raising the specter of another debt cycle [World Bank (2006)].

> 10 The negative net official flows reflect a long-term trend of declining official development assistance. At the same time, a growing number of emerging market economies which are accumulating reserves are  changing the landscape of international financial architecture [Summers (2006), Fofack (2009)]. In fact over the past few years, the aggregated value of official flows to East Asia and Latin America has been globally negative. For further details, see World Bank (2006).

**4**