ABSTRACT
The effort of the South to obtain financial capital for development is a central theme in North-South relations. Developing countries, short of their own funds, traditionally turned to capital surplus countries for private funds in the form of bank loans and the purchase of bonds to finance infrastructure and productive facilities. In the nineteenth century, for example, British capital helped build U.S. railroads and industry; and in the first half of the twentieth century, foreign capital flowed to Latin America to finance industrialization. In the first twenty-five years of the Bretton Woods era, public funds for development were more important than private lending in North-South financial relations. Foreign aid, virtually nonexistent before World War II, came to account for a large portion of financial transfers to developing countries in the 1950s and 1960s. Then, in the 1970s and early 1980s, private financial flows reemerged as commercial banks in the developed countries financed public works and private industry in many developing countries. This was followed by a global debt crisis that temporarily stemmed the flow of new private bank loans to the Third World. Public flows resumed their growth during the debt crisis, partly to compensate for the interruption of private flows. In the late 1980s and early 1990s, private flows resumed to the most creditworthy developing countries. Private bank loans did not play as large a role in this period as they had in the 1970s. Instead, much of the increased flow of private capital to the South came from new sources such as international mutual funds. The other developing countries continued to depend heavily on public flows. In this chapter, we examine the evolution of financial flows, both public and private, in North-South relations.
