Private capital flows and growth

The premature celebration of the boom in capital flows in the first half of the 1990s has been replaced in recent years by a skepticism that is equally unwarranted. Private capital flows are not likely to solve all development problems and can impose significant costs. However, when harnessed effectively, they can boost investment and spur productivity growth. Domestic policy priorities that foster more efficient investment will also attract productive foreign capital. Ultimately, domestic strength, including a robust and prudent financial sector, will also protect a country from the volatility induced by capital flows. However, special safeguards, such as higher foreign exchange reserves or contingent credit lines, may be advisable in certain situations.