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# Summary findings

Q ureshi assesses the mediumii- to long-term outlook for global demanid and supply of capital. He reaches the following conclusions:

* The demand for investnment funds **in** developing countries will remain strong, hut most increased demand will likely be met by domestic savings. Investment's share in GDP will probably rise in these countries, hut so will savings' share, so their net claim on industrial countries' savings is likely to remain small. Of course, savings will not rise automatically. It is esseintial that policies, institutions, and the economic enivironmilienit be conducive to saving.

* Financial liberalization and integration of international capital markets will continiue to give developing countries as a group improved access to private foreign capital. But whether specific countries attract and sustain such inflows will depenid on their economic prospects and policies, includinig conditions that promnote domestic saving and investment (to both attract foreign capital and help limit it to sustainable levels). lnvestment needs in developing countries are great, but "effective" demand for foreigin capital will remain limited by the countries' perceived

creditworthiness and viabiiity. Despite the sharp rise in aggregate private capital flows to developing countries in the 1990s, only a dozen or so of them receive significant amounts of private capital.

* Most low-income countries will continue to depend mainly on official capital for some time. But official capital will likely be increasingly scarce, so these countries must intensify their domestic resource mobilization and accelerate the policy reform needed to attract private investment.

* The critical factor in alleviating pressure on global interest rates will be progress on fiscal consolidation in industrial countries, especially the reform of social security systems. Net capital flows from industrial to developing countries are much smaller than the budget deficits in industrial countries. In 1994, for example, lowering the industrial countries' budget deficit by about 20 percent would have freed up enough money to finance the entire net capital flow to developing countries.

* International capital markets will tend to remain tight in the coming decade, but a severe global capital squeeze and a big increase in global real interest rates (which some fear) are unlikely if industrial countries continue fiscal consolidation. Without such consolidation, global real interest rates could rise well above already high recent levels of about 4 percent, with adverse consequences for all countries.

This paper - a product of the Internationial Economic Analysis and Prospects Division, International Economics Departmentis part of a larger effort in the department to analyze major trends and issues in the global economic outlook and their implications for developing countries. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Virginia Barreto, room 14-327, telephone 202-458-7216, fax 202-522-2112, Internet address vbarretouQ worldhank.org. October 1995. (30 pages) _The Policv Research Working PapPr Series dissbyinates the ficRdings of_ ea _ork in progress to encourage the exehange of ideas about devoelopmenzt issue s An obilcctit of the se ri,es is to get the findings out quickly, eiien if the presentationis are less than frtlly polisbed. The pa pers carry thye n 7me(s of theau iPt¢zs apic sho>uld be, use.la.nd c iteda(c cordingly. The fitidings, interpretations. and conclulsions are the authors'owsn an,l sbould not be attribuZted. to the Worldi B,ank, its Fxecutiv)e Bo,ard of Directors, or any of its member counztries._ 1'rodiucedl bv the Policv Research Dissemination Center