Financing Development

Abstract

Investment in physical and human capital must be matched by savings, either from domestic sources or from abroad. If growth is to be sustained and self-generating, most of the savings will have to come from the domestic economy. Foreign savings can be useful as a source of financing for domestic investment, but in some countries it has been viewed merely as a substitute for local resources. This can result in an unhealthy dependence—political as well as economic—on foreign savings from both public and private sources. Lack of domestic savings effort may also threaten future receipts of foreign savings. Private investors will worry about repayment prospects, while multilateral and bilateral agencies generally require “counterpart” contributions by the country receiving project assistance.¹ If receipts of foreign savings thus become erratic, and additional domestic resources are not mobilized when foreign savings decline, economic growth will be affected adversely.