The Least Developed Countries Report 2000

Aid, Private Capital Flows and External Debt - The Challenge of Financing Development in the LDCs

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What the world's poorest countries need most is not simply debt relief, but a 'New Deal' in international development cooperation, contends UNCTAD in its Least Developed Countries 2000 Report. Almost two thirds of the 48 least developed countries (LDCs) have an external debt burden, which is unsustainable according to international criteria. The report also states that past efforts to substantially decrease their debt service payments have failed, and recent attempts to finally resolve the debt problem through the Heavily Indebt Poor Countries (HIPC) Initiative are not very promising. The LDCs also looks at economic growth and social trends in the LDCs in the 1990s, financing development, and ways in which new approaches to partnerships can increase the effectiveness of aid.



Aid, private capital flows and external debt: A review of trends

As the last chapter has shown, the central accumulation processes of the LDC economies are dominated by external sources of finance. In the long term, if economic growth can be successfully sustained, it is reasonable to expect that domestic resource mobilization will be considerably strengthened, and it is important that policy efforts seek to accelerate this process. But for the immediate future, the basic policy issue which must be addressed in relation to financing development in LDCs is whether external finance is both sufficient for, and supportive of, economic growth, poverty reduction and sustained development. In addressing this question, it is helpful first to consider the sources of external finance and the form they take. The possible sources of finance include, on the one hand, official capital flows in the form of grants or loans, provided by bilateral and multilateral aid agencies, packaged with or without technical assistance, and on the other hand, private capital flows from banks, capital markets, companies and individuals, which take the form of short-and long-term loans, acceptance of company and government bonds, and portfolio and direct investment. These capital inflows may or may not be debt-creating, and net capital outflows generated by residents may also reduce total resources available for finance, offsetting net capital inflows generated by nonresidents.


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