Financial sector development - Sida

6.2 Increased demand for capital from the private sector
The efforts of developing countries to improve the environment for private sector
development and to open up their economies for local entrepreneurs and local investors
have created an increased demand for financial sector reforms. Several private sector
assessment studies confirm that the dearth of long-term finance (including risk capital 1 )
for investment purposes is a major obstacle for the growth of the trade and industry
sectors in these countries.
6.3 Restructuring and privatisation of public enterprises
The experience from some developing countries shows that privatisation of state-owned
enterprises has served as an impetus for governments to speed up financial sector
reforms. The redefined role of the state (to be less involved in the production and
distribution of goods and services and rather focusing on supervising the market
mechanisms and stimulating a healthy competition in the private sector) as well as the
need to reduce the fiscal drain of public enterprises have been the major forces behind
the efforts to privatise such firms. Particularly in Eastern and Southern Africa, these
efforts have met with a number of obstacles. One hurdle is inefficient capital markets.
Only a limited number of countries in this region have developed proper stock exchanges
or contractual savings institutions, which could facilitate for local private investors to raise
the capital needed to acquire state-owned enterprises.
6.4 The global race for foreign direct investments
The globalisation of trade and financial flows is presently transforming the world
economy. This process is driven by several factors, such as the liberalisation of trade and
capital markets, increasing internationalisation of corporate production and distribution
strategies, and technological change that is fast eroding barriers to tradability of goods
and services and the mobility of capital. In the coming ten years world trade is projected
to grow by 6 per cent. Developing countries are a driving force in this process of change.
Their GDP growth is expected to be around 5 per cent per year as compared to less than
3 per cent in the developed countries.
Annual average net long-term private capital flows to developing countries have
increased from around USD 35 billion in the mid-1980s to almost USD 200 billion in the
1994-96 period. This increase of private capital flows contrasts with the decreasing flow
of official development finance (presently around USD 50 billion per year).
About half of the net private capital flow is accounted for by foreign direct investments
(FDI). It is true that a large share of these funds is concentrated to a limited number of
countries in Asia and Latin America but the number of recipient countries is growing each
year. The total value of FDI flows to Sub-Saharan Africa increased from less than one
billion dollars in 1990 to around three billion dollars in 1996.
FDI flows tend to go to countries which can offer a stable and transparent economic
environment. A functioning capital market is one important sign of such an environment.
1 In this report interpreted as equity capital and loans in different forms which are not fully secured
28