Tuesday, November 8, 2011

Determinants of financial flows from BRICs to LICs

Turns out BRICs lend more to low income countries with weaker institutions. Interestingly, interests on loans are higher for countries that have weak institutional indicators (i.e. higher the risks, higher the interest rates). And, land-locked, resource-scarce low income countries receive less financing than resource-rich countries. Below is the abstract from a working paper by Nkunde Mwase of the IMF.

BRICs development financing flows have increased significantly and are expected to become more prominent in the post-crisis era. We investigate the potential implications on the country-allocation of loan commitments and the degree of concessionality using a panel vector autoregression model and single equation dynamic panel estimation.We find that BRICs lend more to LICs with weaker institutions. Land-locked, resource-scarce LICs receive significantly less financing than other resource-rich LICs. The degree of concessionality is negatively correlated with the amount of loans and positively correlated with better institutional indicators suggesting that the higher the risks, the higher the required returns that BRICs expect.