The lessons of the Asian financial crisis of the late 1990s highlight the importance of monitoring and managing external debt flows effectively.

External debt

For the developing economies in Asia and the Pacific, the net external debt relative to GDP in 2005 stood at 23.4 per cent. Figures 19.1 and 19.2 show the downward trends following the Asian financial crisis in 1998, when the region displayed an average rate of 37.7 per cent. As expected, the downward trend is even more pronounced for the ASEAN region, which includes “crisis” economies
such as Thailand, Malaysia and Indonesia among its 10 members. Starting from an average rate of 98.4 per cent, the ASEAN region has marked a steady decline to 44.1 per cent in 2005. Compared with another region that “hosted” a financial crisis in the late 1990s — Latin America and the Caribbean — the Asian and Pacific region has achieved a stronger reduction in net external debt relative to GDP, despite a sharp decline in Latin America and the Caribbean from 40.5 per cent in 2004 to 29.8 per cent in 2005. The highest levels of net external debt in the Asian and Pacific region are found in Central Asian countries and landlocked developing countries, which had average rates of 54.1 and 56.2 per cent, respectively, in 2005.

Figure 19.1 Net external debt (relative to GDP) in Asian and Pacific developing economies, Africa and Latin America and the Caribbean, 1990-2005

Figure 19.2 Net external debt (relative to GDP) in selected Asian and Pacific country/area groupings, 1995-2005

Debt-service payments relative to export earnings have also marked a decline since the late 1990s, from about 10 per cent to 4.9 per cent in 2005. The region thus has less debt-service obligations than Latin America and the Caribbean, which also marked an impressive decline, from 21.3 per cent in 2000 to 14.8 per cent in 2005. Africa is doing as well on that indicator as the Asian and Pacific developing economies, with a steady decline from the disturbingly high level of 28.8 per cent in the early 1990s to 7.9 per cent in 2005. At the country level in the Asian and Pacific region, the highest rates are found in Turkey (20.1 per cent), the Philippines (12.4 per cent) and the Russian Federation (11.1 per cent) in 2005.

Foreign direct investment

During the period 2002-2006, FDI inflows accounted for 56 per cent of all net capital flows to developing countries according to the World Bank, while portfolio flows, official flows and other capital transactions (e.g. bank loans) accounted for 16, 10 and 19 per cent, respectively (World Bank, 2007).

FDI inflows as a percentage of gross fixed capital formation (GFCF) has remained quite stable in the Asian and Pacific region, on average, ranging from 5 to 7.5 per cent between 2000 and 2006, or 6 per cent from 2001 to 2005. The figure for low-income countries is by far the highest, averaging 44 per cent from 2001 to 2005. Among the country groupings in Asia and the Pacific, the figure for small island developing States was highest, with an average of 50 per cent over the period 2001 to 2005, followed by Central Asian countries (29 per cent) and landlocked developing countries (25 per cent). The high percentage for the small island developing States is in large part due to very high FDI inflows into the Marshall Islands in 2004 and 2005, a country which, until August 2007, was on the OECD list of uncooperative tax heavens.

Among the largest recipients of FDI in relation to GFCF over the period 2001 to 2005 was Brunei Darussalam with an average of 104.7 per cent, followed by Tuvalu (64.8), Hong Kong, China (63), Kiribati (62.4), Azerbaijan (57), Singapore (56) and Tajikistan (50).

A similar pattern is visible when studying inward FDI stock as a percentage of GDP. In 2006, this list was led by Hong Kong, China (405.7 per cent), followed by Kiribati (244.4), Singapore (159.0), Vanuatu (130.2), Palau (92.5), Tuvalu (90.5), Brunei Darussalam (86.2) and Azerbaijan (66.9).

Overall, this shows that, although China is by far the largest recipient of FDI in the region in absolute terms, the picture looks quite different when inflows and stocks are compared with the size of the economies and their overall investment levels. In this comparison, major trading and financial centres, small island developing States and resource-rich economies end up high on the list of FDI recipients. However, it must be borne in mind that a high percentage of FDI in relation to GFCF can also point to a low level of generation of domestic capital for investment. In addition, it must be noted that, in some instances, FDI from and in developing host economies ( China and Hong Kong, China, for example) is due to round-tripping.¹ In the case of inward FDI in China, estimates vary from 25 per cent (UNCTAD, 2003) to 50 per cent (Xiao, 2004).

These figures show that FDI can and does make a substantial contribution to the financing of investments, in particular for small island developing States and resource-rich countries. Apart from providing much-needed foreign capital, FDI can also lead to increased knowledge and technology transfer, employment and tax incomes. However, different types of FDI may provide this to varying degrees. For example, employment creation is normally larger in the manufacturing sector, in particular in developing countries, while it is the smallest in the primary sector, including the mining and oil industry (UNCTAD, 2007, p. 11). Furthermore, greenfield investments would generally be expected to provide a larger increase in employment and value added than mergers and acquisitions, at least in the short run, as they provide additions to production capacity rather than a shift in production control and management (UNCTAD, 2007 p. 9). Thus, in addition to studying the quantity of FDI, it is important to study the quality of FDI, including its spread among sectors, and the contribution of FDI to employment in a country. To date, the availability of such data is limited, not only in Asia and the Pacific but worldwide.

Asia and the Pacific is increasingly becoming not only a destination for, but also a source of, FDI. In the UNCTAD list of the world's top 100 non-financial transnational corporations (TNCs) in 2005, nine were from Japan, and six out of the total of seven developing-country TNCs were from Asia and the Pacific (Republic of Korea (2); Hong Kong, China (2); Malaysia and Singapore). In the UNCTAD list of the top 100 non-financial TNCs from developing countries in 2005, Asia and the Pacific hosts 78 of the companies, with the majority coming from Hong Kong, China (25); Taiwan Province of China (18), Singapore (11) and China (10) (UNCTAD, 2007, annex).

Official development assistance

Official development assistance (ODA) is another major source of financing for developing economies. The responsibility of the developed world to provide funding for purposes of economic development in developing countries has recently been reaffirmed in the Monterrey Consensus, which urges developed countries to raise their ODA disbursement to meet the target of 0.7 per cent relative to their GDP.

The developing economies of Asia and the Pacific received 0.4 per cent, on average, in 2005, which is considerably less than the economies in the African region - the primary receivers of ODA worldwide - with 3.6 per cent, on average. Latin America and the Caribbean received approximately the same amounts in relation to gross national income (GNI), with 0.2 per cent. The levels for these regions have remained more or less the same since 2000.

At the subregional level, vulnerable groups, such as small island developing States (9.8 per cent), least developed countries (5.8 per cent) and landlocked developing countries (4.5 per cent) received the bulk of ODA received in the Asian and Pacific region in 2005. Again, the levels throughout Asia and the Pacific have remained more or less stable over the past decade, with the exception of the least developed countries, whose level increased from 4 per cent in 2000 to 5.8 per cent in 2005, and the small island developing States, which have experienced a downward trend in recent years, from a temporarily high 12.2 per cent in 2000 to 9.8 per cent in 2005.

Figure 19.3 shows ODA in relation to GNI for 1990 and 2005 at the country level. In 2005, conflict-torn Afghanistan and Timor-Leste received particularly high levels of ODA, accounting for 40.6 and 26.7 per cent of GNI, respectively. Other primary ODA recipients were small island developing States, such as the Solomon Islands (53.8), Micronesia (43.0) and Tuvalu (36.1).

Figure 19.3 Proportion of ODA received in relation to GNI in Asia and the Pacific, 1990 and 2005