Monday, June 11, 2007

External Finance for Developing Countries

What causes external financial difficulties for developing countries?

  • Difficulty of attracting foreign capital flows, will lead to current account deficit.

1. Overvalued exchange rate, makes exports more expensive and makes it less attractive to invest in the country.

2. corruption and poor credit history

There is No guarantee money will be well used. People feel investment is risky, because of track record. Firms require a higher return on investment to make the risk worthwhile.

3. Poor infrastructure.

Makes investment less successful

However, developing countries have certain advantages:

  • low wage costs
  • scope for growth
  • natural resources
  • examples of India and China in attracting external finance

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