Capital flows and growth across developing countries

•’South-South’ flows arise from existing ’North–South’ imbalances.•fast-growing developing countries scale up holdings of debt assets origniated in developed countries.•this creates net capital outflows despite inflows of foreign direct investment.•also reduces the world interest rate such that slow-growing developing countries reduce holdings of debt assets•they experience net capital inflows despite outflows of foreign direct investment. Foreign direct investment inflows are positively related to economic growth across developing countries—but so are savings in excess of investment. This paper develops an explanation for these known empirical findings by focusing on the limited availability of consumer credit in developing countries, together with general equilibrium effects. In the model, fast-growing developing countries scale up their holdings of debt assets, which creates net capital outflows—despite inflows of foreign direct investment—and reduces the world interest rate. Slow-growing developing countries reduce their holdings of debt assets in response, which creates net capital inflows despite outflows of foreign direct investment.