From Econbrowser by Laura Alfaro, Sebnem Kalemli-Ozcan, Vadym Volosovych:
Uphill capital flows and global imbalances have taken center stage at academic and policy debates for some time. Over the past two decades, capital seems to have been flowing upstream from fast-growing to stagnant countries. At the same time, emerging market economies experiencing rapid growth have accumulated vast foreign reserves. Many of the theoretical explanations advanced for these phenomena center on these high growth emerging countries’ relatively higher saving rates—either due to insurance or mercantilist reasons—channeled to countries that supply safe assets such as the U.S. (see for example Caballero, Farhi, and Gourinchas (2008) and Gourinchas and Jeanne (2013)). Although external imbalances have decreased quite a bit since the global financial crisis, they have not disappeared yet.
In Alfaro-Kalemli-Ozcan and Volosovych (2014) we show that such net capital outflows during last decades from high growth emerging markets and/or net capital inflows to low growth emerging markets, are driven by sovereign-to-sovereign transactions. By sovereign-to-sovereign transactions we mean capital flows between two official bodies, such as government debt and aid, where both the debtor and the creditor is a public agency or an international institution. This finding explains why the correlation between productivity growth and net capital flows measured as the current account balance with a reversed sign—that is, the difference between a nation’s investment and its savings— might yield different results depending on the sample used by different researchers. Net capital flows consist of net private flows and net public flows, and the correlations of these two types of net flows with productivity growth differ in sign.
Figures 1 and 2 demonstrate this fact visually. They both plot long run correlation between net capital flows and growth over 1980-2007, where net capital flows are measured with current account sign reversed. The only difference between the figures is the country samples. Figure 1 is based on a smaller sample that is dominated by countries from Asia and Africa, whereas Figure 2 plots the same correlation using a larger sample including Eastern European countries. The difference is striking.