External financing for development and international financial instability

Abstract

The net transfer of resources from developed to developing countries has long been at the centre of the development strategy promoted by the United Nations. However, the long-term historical trend has been just the opposite and has become more pronounced with increased private international capital flows. This paper uses theoretical analysis based on the work of Domar and Minsky to derive the conditions under which positive net resource transfers are compatible with international financial stability and notes that since this condition is equivalent to a Ponzi scheme stability can only be temporary. Since the response to instability is a reversal of net resource flows this explains why sustained positive net flows have been so difficult to achieve.

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