The Global Financial System and Developing Countries

Abstract

The global financial system has changed significantly since the 2007-08 financial crisis. Developing countries have seen a decline in their net financial flows due to the collapse of the international banking sector. This was further exacerbated by weak growth prospects in key emerging markets and low commodity prices from 2014-15. The decline was somewhat offset by higher non-resident portfolio inflows, which resulted from prolonged ultra-low interest rates in advanced economies and the ensuing “search or yield”. While countries in East and South Asia continue to be major recipients of global financial flows, they have also become major providers, particularly for other developing countries. Hence, South-South finance is a growing trend. Additionally, public financial flows, namely overseas development assistance and multilateral lending, have exhibited strong growth since 2007 further mitigating the decline in private flows.