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Self-Financing Development

Developing countries have been accumulating foreign-exchange reserves at an unprecedented pace in recent years, with their total volume now totaling roughly $5 trillion. If developing countries were to use a small portion of this wealth to increase financing for regional and sub-regional development banks, they could more easily meet their infrastructure investment needs.

NEW YORK – A remarkable feature of the international financial system in the last decade has been the rapid and vast accumulation of foreign-exchange reserves by developing countries. World foreign reserves tripled from $2.1 trillion in December 2001 to an unprecedented $6.5 trillion in early 2008, according to IMF data.

Developing countries as a whole accounted for more than 80% of global reserve accumulation during this period, and their current level of reserves approaches $5 trillion. Half of this volume is concentrated in developing Asia, but Latin America and Africa have also been amassing international assets at a remarkable pace. This pool of reserves surpasses developing countries’ immediate liquidity needs, leading to their increased creation and expansion of sovereign wealth funds, which have an additional level of assets of more than $3 trillion.

The unprecedented increase in developing countries’ foreign exchange reserves is due both to their current-account surpluses and large net capital inflows. Practically all developing countries’ reserves are invested in developed countries’ assets, leading to an increasing net transfer of resources from the developing to the developed world, which, according to UNDESA estimates, reached $720 billion in 2007 alone.

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