Here, we explained that a country’s international financial situation as reflected in its balance of payments and its level of monetary reserves depends not only on its current account balance (its commodity trade) but on its capital account balance (its net inflow or outflow of private and public financial resources. Because a majority of non-oil-exporting developing nations have historically incurred deficits on their current account balance, a continuous net inflow of foreign financial resources represents an important ingredient in their long-run development strategies. These recurrent requirements are amplified by the need for targeted resources for investments in key sectors and for carrying out poverty reduction strategies.
In this chapter, we examine the international flow of financial resources, which takes three main forms: (1) private foreign direct and portfolio investment, consisting of (a) foreign “direct” investment by large multinational (or transnational) corporations, usually with headquarters in the developed nations, and (b) foreign portfolio investment (e.g., stocks, bonds, and notes) in developing countries’ credit and equity markets by private institutions (banks, mutual funds, corporations) and individuals; (2) remittances of earnings by international migrants; and (3) public and private development assistance (foreign aid), from (a) individual national governments and multinational donor agencies and, increasingly, (b) private nongovernmental organisations (NGOs), most working directly with developing nations at the local level. We also examine,the nature, Significance, and controversy regarding private direct and portfolio investment and foreign aid in the context of the changing world economy. As in earlier chapters, our focus will be on ways in which private investment and foreign aid can contribute to development and on ways in which they may be harmful. We then ask how foreign investment and aid might best serve development aspirations.
Finally, we examine the consequences, causes, and resolutions of violent tonflict in developing nations, and consider strategies for its prevention. Conflict is often referred to as “development in reverse”; it is among the most difficult problems for economic development. Recently, conflict resolution and post-conflict recovery has been a focal point for foreign assistance. The end-of-chapter comparative case study of Costa Rica, Guatemala, and Honduras on the roots of divergence among developing countries has a major focus on social conflict.