An empirical analysis of international capital flows: implications for the BRICS New Development Bank (NDB)

Zhang, Chen
Maloney, Tim
Rossouw, Stephanie
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Master of Business
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Auckland University of Technology

In recent decades, economic globalisation with the emergence of the BRICS (Brazil, Russia, India, China, and South Africa) countries has attracted the world’s attention. These countries have recently established a “New Development Bank (NDB)” to help the developing world and increase their own global effectiveness. For the purpose of providing policy suggestions to the NDB, this dissertation assesses the historical effects of foreign direct investment (FDI), foreign aid, and external debts on the economic growth of developing countries. The empirical evidence is derived from the panel data on 96 low to middle income developing countries over the 1991-2011 period. The Solow model is utilised based on multiple linear regression methods.

To provide more detailed policy indications to the NDB, the regression models are conducted aggregately for the whole sample and specifically for the countries with different income levels (low income countries [LIC], lower-middle income countries [LMIC], and upper-middle income countries [UMIC]). When considering the sample as a whole, the results include: (a).weak diminishing returns to scale exist; (b).capital stock, employment and FDI promote economic growth while total official development assistance (TODA) and total external debt (TED) do not; (c).multilateral official development assistance (MODA) reduces economic growth while bilateral official development assistance (BODA) stimulates the economy; (d).World Bank loans (WBL), IMF credit (IMFC) and other external debts (OED) have no significant effects on the economy. When considering different income levels individually, I find: (a). the LIC and UMIC are very likely to have constant returns to scale, while the LMIC tend to have diminishing returns to scale; (b).capital stock and employment are more important for the UMIC while FDI generates more benefits for the LIC and LMIC; (c).TED weakens the LMIC’s economy; (d).MODA dampens the economy of the UMIC while BODA stimulates growth in the LMIC and UMIC; (e).WBL weakens the LIC’s economy but benefits the LMIC, and IMFC harms the economy of LMIC.

Based on these results, I can say that probably, the establishment of the NDB is important for the LIC and LMIC to set foot on the track of growth. The policy implications are that if the NDB is established, it should: (a).invest and guide FDI flows into the LIC and LMIC, especially to the projects that increase capital stock; (b).learn lessons from as well as cooperate with traditional MODA agencies; (c).take over some functions from the WB and at the same time as cooperating with the WB; (d).cooperate with the International Monetary Fund (IMF) and make sure the funds have appropriate conditions attached and go to the right countries; (e).advise the UMIC to phase out MODA, IMFC and OED (while BODA and WBL tend to be wiser choices), and probably give them guidance on policies.

Although obstacles exist, the NDB is predicted to be a complement to the traditional MODA agencies and international financial institutions. I hope that the NDB with the traditional institutions could improve world economic governance and achieve their common goal to contribute to the growth of developing countries.

International capital flows , International financial institutions , BRICS New Developement Bank (NDB) , Developing economies , Solow growth model
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