This chapter, like the preceding one, is concerned with the problem of financing an accelerated rate of development without engendering inflation. Chapter 3 was devoted to a discussion of the problems encountered by developing countries in raising the volume of the first source of finance, namely voluntary savings; the present chapter is concerned with the second source of finance – external capital. It is important to emphasise here that the topics of the two chapters are closely interrelated because of the likely interaction between savings and foreign capital. While on the one hand the availability of foreign capital can, as we shall see, be instrumental in increasing the rate of growth of voluntary savings, on the other it tends to reduce the pressure on the authorities to raise the share of savings in national income through fiscal and other measures. In this connection it is worth noting that the failure of many developing countries to raise the ratio of savings by restraining consumption, discussed in Chapter 3, goes some way to explain their growing reliance on foreign capital to finance domestic expenditure.

We shall first examine in somewhat greater detail than was done in Chapter 2 (pp. 60–2), the role that can be played by foreign capital in general in assisting economic development. We shall then present some data on the volume of different categories of external capital received from various sources by LDCs in recent years and examine the potential of each category of capital to promote economic development.