The IMF and World Bank are advocating a new paradigm for capital flows founded on the efficiency of free-flowing private capital. This implies limiting the role of public sector institutions (including the IMF and the World Bank) to helping the market to operate effectively, intervening directly only where it fails to operate.
The IMF and the World Bank have pursued and are further pushing this paradigm shift through:
structural adjustment programmes (SAPs);
direct support for the private sector via the International Finance Corporation and Multilateral Investment Guarantee Agency and other guarantees;
Aided by these actions, there has been a massive growth in the flows of Foreign Direct Investment (FDI), portfolio equity investment and commercial lending to developing countries in recent years. This trend has coincided with a decline in official flows of grants and loans. According to the logic of their paradigm commercial capital flows should be able to compensate for this decline, yet poverty is pervasive and crises in Mexico, East Asia and Russia show a continuing need for official flows.