UPSC Prelims 2002 · General Studies
Question 70: Economy and Social Development
Global capital flows to developing countries increased significantly during the nineties. In view of the East Asian financial crisis and the Latin American experience, which type of inflow is considered safest for the host country?
AnswerThe answer is (b).
Foreign direct investment is considered the safest inflow because it brings long-term capital, technology and management, it is not a debt to be repaid on a schedule, and it is hard to pull out quickly. Portfolio flows and short-term loans can reverse suddenly, as in the East Asian crisis of 1997 and in Latin America, while commercial loans and ECBs add to external debt.
Why each option is right or wrong
- (a) Commercial loans add to debt and must be repaid on schedule.
- (b) Right: FDI is stable, long-term and non-debt creating.
- (c) Portfolio flows can reverse suddenly, as they did in 1997.
- (d) ECBs add to external debt and repayment pressure.
Explanation: written by UPSC Grade, not by UPSC.
Source: UPSC, Civil Services (Preliminary) Examination 2002, General Studies. UPSC's own paper isn't online; the words are from a published compilation. The paper on upsc.gov.in.