Capital Flows to Under-Developed Countries

Abstract

A primary feature of under-developed countries’ economies, constituting a serious barrier to their development efforts, is a low level of domestic savings and capital formation. External capital can help to bridge the gap in moving from a low level to a higher, and eventually self-sustaining, level of capital formation. There are obviously limits to the capacity of under-developed countries to absorb a capital inflow, set by the availability of real resources, without generating an inflation which would itself check development. Moreover, an adequate supply of capital is normally a necessary but not sufficient condition for speeding up development; it must be matched, for example, by human resources (skills, education, and so on) capable of making use of the new capital facilities. And in most cases it must be supported by an increase in the export earnings of the under-developed countries. Nevertheless, if we consider the urgent needs to raise the very low living standards of the vast populations in the under-developed countries and the generally widening gap between incomes per head and those of the developed countries, it is clear that additional supplies of capital must be forthcoming, generally from external sources.

Mr. Parsons iS Head of the Economic Development Division of the O.E.C.D. Any views expressed in this article are his own, and are not to be attributed to the O.E.C.D.