The Volatility of Capital Inflows: Measures and Trends for Developing Countries

This paper reports on trends and levels of capital inflows, and the volatility of such inflows, to a sample of 60 developing countries over the period from 1970 to 1997. The data cover aid and other development finance as the principal forms of official flows, FDI and other private flows, and debt (stock and flows). For each type of inflow to each country, three alternative measures of instability are calculated. To summarise the results, the countries are grouped into low income, lower middle and upper middle income. The measures of instability for each type of flow in each group and the evolution over time are discussed. The paper provides evidence that instability has increased in the 1990s (relative to the 1980s, but not to the 1970s), that official flows are less volatile than private flows, and the instability in FDI is lower than in other private flows. The paper also shows that the poorest countries have become increasingly reliant on aid and debt finance, attracting almost no private capital and little FDI. Only the richer developing countries attract significant volumes of FDI and private capital (but both are quite volatile). Outline