Keynote Address

Professor Raghuram Rajan delivered the Keynote Address on Foreign Capital and Economic Growth in Developing Countries: Issues and Challenges. Professor Rajan is currently Eric J. Gleacher Distinguished Service Professor of Finance, Graduate School of Business, University of Chicago. Until recently, he was the Economic Counsellor and Director of Research at the International Monetary Fund - the first and youngest finance researcher to hold this very influential research position. Professor Rajan was the first Area Leader in Finance, during ISB’s formative years and had drafted the concept note on the CAF, playing a key role in its set up.

In his address Professor Rajan highlighted facts like-

• Capital is not flowing more to poor countries over time as they improve their financial systems. In fact, flow is reversing in recent times.
• Non-industrial countries that have utilized the most foreign capital, have tended to grow more slowly.
• For non-industrial countries, given a level of investment, the more it is financed through domestic savings, the higher the associated growth is.
• Foreign capital usage is negatively correlated with growth.
• Countries are more likely to grow if they consume less and save more during growth spurts.

• Non-industrial countries may have limited ability to absorb it.
• Financial sector may not be able to allocate arm’s length capital.
• Countries may be more prone to exchange rate overvaluation.

This does not necessarily mean countries should close themselves to capital flows – foreign capital could play a role in enhancing absorptive capacity. It does suggest, though, a greater focus on enhancing absorptive capacity, enhancing the capacity of the domestic financial system and enhancing other forms of domestic capacity – e.g. domestic savings and domestic human capital