Private finance floods out of developing countries on a massive scale in 2015

Added 28 Jan 2016
If you’ve never read the UN’s World Economic Situation and Prospects (WESP report) before, put a note in your calendar to do so. It’s always interesting, and consistently one of the most useful annual publications of any major international organisation. 

I’m wading through my copy, but wanted to share some startling figures from this year’s edition, released last week. The headline is that 2015 saw an enormous outflow of private financial resources from developing countries.
The chart below doesn’t include all sources of finance, (which would include aid, remittances and so on) – it’s just looking at ‘financial flows’ by which it means (largely) private investment flows, and the buying and selling of financial instruments by governments to build, or reduce, reserves. 

It also doesn’t include the huge problem of illicit financial flows, and tax losses by developing country governments (you can look at this recent Eurodad report if you want more on the figures, or this one for what the EU should be doing to crack down on multinational tax dodging.)

Volatile private flows are behind this alarming picture. Most people think of foreign direct investment (FDI) when they imagine private flows, but the WESP points out that other private flows are much more worrying at present. The above figure is compiled of four basic financial flows:

FDI - While FDI to developing countries fell dramatically (by $175 billion) in 2015, it was still a net positive flow worth $260 billion.
Portfolio investment (buying stocks and shares) - went negative in 2015, sucking $48 billion out of developing countries.
Other private investment (including interbank loans) - collapsed spectacularly, sucking a jaw-dropping $827 billion out of developing countries in 2015 (it has been a negative outflow since 2011).
Reserves - the overall picture would have been even more negative had developing countries not sold their reserves on a significant scale – leading to an inflow of $395 billion according to the WESP (for the previous decade developing countries had been building reserves). 

While China – because of its size – is the major driver of this trend of massive capital outflows, “similar trends were observed in virtually all major emerging economies”.

So we should begin the year with a great deal of trepidation – but also mindful of the fact that this is nothing new: private financial flows have always been volatile, with the potential for wildly destabilising swings. This is why Eurodad will continue to combat the message that leveraging more private finance should be at the centre of development finance debates. Instead, we should be talking about how to reduce the risks of private finance, and how to actively manage it to maximise the benefits.