FOREIGN CAPITAL INFLOWS to developing countries constitute part of the world's saving. Over the past two decades, world saving as a proportion of world income has fallen. A comparison of the periods 1968-81 and 1982-88 illustrates this worldwide decline in saving ratios (Aghevli et al. 1990, pp. 9 and 36-37): saving in developed countries has fallen from 25 to 20 per cent of GNP and developing country saving has fallen from 25 to 22 per cent of GNP. One important reason for the worldwide decline in saving is rising government deficits: up from 2.9 per cent in the period 1972-80 to 4.5 per cent in the period 1981-88 (International Financial Statistics Yearbook [1988, p. 156; 1991, p. 156]).

The decline in world saving implies that not every country can maintain its level of domestic investment by increasing foreign capital inflows. Overall, the decline in saving has to be matched by an equal decline in investment. In fact, saving and investment ratios have fallen in all geographical regions of the world since 1982, but least in developing countries of Asia and the Pacific. As world saving has shrunk, so the world real interest rate has risen from 1.5 per cent during the period 1970-80 to 4.8 per cent in the period 1981-91. With no signs of a reversal in the declining trend in global saving and the immediate saving-reducing impacts of the war in the Gulf, reunification of Germany, reconstruction of Eastern Europe, and deliberate current account-reduction policies being implemented by Japan, Korea, and Taiwan, the costs of foreign borrowing can be expected to rise still higher in the 1990s.

The decline in foreign capital inflows to developing countries has necessitated structural adjustment in the form of an increase in export earnings or a reduction in import expenditure. The national accounting identities imply that the adjustment has to raise national saving or reduce domestic investment.