The shifting geographic patterns of saving and investment activity will also be manifested in patterns of global capital flows. In the gradual convergence scenario, much of the developing world will run moderate, gradually attenuating deficits. This pattern will predominate among countries that are relatively early in their demographic transitions and have significant scope for financial market development, which tends to moderate saving and at the same time boost investment. For example, India and, on aggregate, Sub-Saharan Africa fit this description well; they will run current account deficits averaging 2.4 percent and 3.2 percent of GDP, respectively, over 2010–30 under this scenario. Under the rapid convergence scenario, this pattern will be even starker as faster financial development attracts capital and at the same time moderates private saving. These net capital inflows will not come primarily from the North but from newly industrialized East Asian countries, most notably China.
The relevance of capital flows, however, extends well beyond the balance of a country’s borrowing or lending captured by net inflows or outflows. Gross inflows and outflows can be thought of as trade in financial assets. In this sense, the future path of a country’s gross capital inflows and outflows depends on (a) the strength of demand for foreign assets; (b) the country’s capacity to supply assets with return and risk characteristics appealing to international investors and creditors; and (c) the degree of frictions—for example, problems of asymmetric information—that potentially inhibit this exchange.
Institutional improvement and financial market development in the developing world, combined with an environment of rising perceived risk in high-income economies, appears set to remove advanced countries’ monopoly on supplying high-quality assets. Encouraged by improvements in the business environment, solid economic growth, and demographic trends supportive of growing consumer demand, investors have shown greater interest in developing countries far beyond large emerging markets, as demonstrated perhaps most clearly in recent years by the growing level of capital inflows to Sub-Saharan African countries. In the future, improvements in institutional factors will co-evolve with ongoing regional and global integration of developing countries’ financial markets, rendering developing countries much more significant sources, destinations, and potentially also intermediaries, of global capital flows.
The scenario analysis estimates that developing countries will account for 47–60 percent of global capital inflows in 2030, up from 23 percent in 2010 (see figure below). There will also be clear changes in the regional distribution of capital flows. Disaggregating the projected increase in capital inflows to the developing world by country shows that China will be an important part of the story, but by no means will it be a China story—nor a BRICs story—alone. By 2030, no single country will attract as great a share of global inflows as the United States or the Euro Area do today. Moreover, small and medium-size developing countries will collectively matter much more in the global economy than they do today, particularly in terms of their role in global financial markets and in driving capital flows.
With developing countries accounting for most of both global gross inflows and outflows under both scenarios, the South-South component of gross capital flows will grow to become significant at the global level. Developing countries’ financial markets will play a much greater role in intermediating capital flows than they do today, both in their role as intermediaries of South-South flows and in their intermediation of capital flows to and from the North. Reserve accumulation will likely decline as a share of developing countries’ outflows, displaced by private flows as financial markets develop and as exchange rate regimes move toward greater flexibility.