flows to developing countries.<sup>11</sup> However, while the bulk of the flows to the three largest recipient regions (EAP, ECA and LAC) are primarily driven by investment motives and opportunities, capital flows to SSA are still dominated by official development assistance. FDI to SSA heavily concentrates in natural resources and particularly oil and gas sectors, and has been highly volatile [UNECA (2006)].

However, unlike private flows and particularly FDI, part of the official flows come in the form of balance of payments support, and as such are primarily used to finance current account deficits. In this regard, their prospects for expanding capital expenditures for long-run growth and economic development are likely to be lower. In a number of empirical studies based on a cross-section of countries, Kose et al. (2006) found that non-FDI flows are less conducive to economic growth than FDI. Similarly, a recent IMF survey found that countries with higher shares of FDI in total liabilities experience higher rates of economic growth [IMF (2007)].

In this regard, the continued large inflows of private capital to emerging market economies may largely explain the robust economic growth enjoyed by these countries. These growth effects of private capital inflows further highlight the benefits of this mode of external financing for engendering virtuous circles of long-run economic growth. According to an IMF study, an increase in FDI by 10 percentage points of GDP is associated with an increase in average growth of 0.3 percentage points (IMF 2007). The massive infusion of capital in emerging market economies played a key role in creating and sustaining the ‘big push’ model— to foster growth and employment creation leading to long-run per capita income growth and economic development during adjustment eras [Edwards (1990), Akyuz and Gore (2001)].<sup>12</sup> However, while the initial ‘big push’ primarily relies on FDI inflows, the repatriation of flight capital held abroad by countries’ residents later played a key role in sustaining the process of capital infusion to sustain economic growth. This process of capital repatriation has been largely documented in the LAC region where capital flight was significant in scope and magnitude, with estimates of cumulative stock (including interest earnings) in the range of US$350 billion by the late 1980s [Lessard and Williamson (1987), Pastor (1989)]. However, in addition to incentives created by the improved macroeconomic environment, the repatriation process was facilitated by the fact that more than 50 percent of flight capital was held abroad in the form of liquid assets [Armendariz de Aghion (1991)].

According to the United Nations’ Economic Commission for Latin America and the Caribbean, significant reflows of capital to the region took place in the 1990s when net private capital flows increased by more than sevenfold. Though numerous countries in the region enjoyed the process of capital repatriation, Chile is often cited as the most successful case where massive repatriation of capital was used to finance productive investment. Net capital inflows to Chile increased to US$3 billion in the early 1990s, from about US$1 billion in the 1980s. These repatriation schemes contributed to a rapid

> 11 Workers remittances are also growing quite rapidly as another form of private resource inflows to developing countries. Most recent estimates suggest that this form of resources flows has increased significantly and now averages over 5 percent of GDP across the developing world. However, Sub-Saharan Africa still has the smallest share compared to other regions. Remittances going to Sub-Saharan Africa increased to nearly USD 20 billion in 2008, up from USD 10 billion in 2005. Despite their steadily growing trend, remittances cannot sustain the ‘big push’ given the widening financing gaps faced by the continent and also because remittances are primarily directed to finance household final consumption [Ozden and Schiff (2006), UNECA (2006), Gupta et al. (2007)].

> 12 In fact while countries in Asia were experiencing investment booms and rapid per capita income growth, Sub-Saharan African countries faced a rapid decline of gross capital formation in the face of falling investment rates and excess depreciation of capital during the adjustment era [Akyuz and Gore (2001), Bayraktar and Fofack (2007)].

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