• The editor in charge of this paper was Fabrizio Zilibotti.

  • Acknowledgments: We thank our referees, editor Fabrizio Zilibotti, Pierre-Olivier Gourinchas, and participants at the 2010 AEA meetings, 2010 NBER-IFM meeting, the 2010 SEA meetings, 2012, ECB Globalization Conference, 2012 CREI-UPF Summer Workshop, and the seminars at Erasmus University Rotterdam, De Nederlandsche Bank for comments, and Francesco Caselli, Gian Maria Milesi-Ferretti, Elias Papaioannou, and Frank Warnock for insightful discussions. Alfaro is a Research Associate at the NBER, Kalemli-Ozcan is a Research Associate at the NBER and a Research Fellow at the CEPR, and Volosovych is a Research Fellow at the Tinbergen Institute and an Associate Member at Erasmus Research Institute of Management (ERIM).


We construct measures of net private and public capital flows for a large cross-section of developing countries considering both creditor and debtor side of the international debt transactions. Using these measures, we demonstrate that sovereign-to-sovereign transactions account for upstream capital flows and global imbalances. Specifically, we find that (i) international net private capital flows (inflows minus outflows of private capital) are positively correlated with countries' productivity growth, (ii) net sovereign debt flows (government borrowing minus reserves) are negatively correlated with growth only if net public debt is financed by another sovereign, (iii) net public debt financed by private creditors is positively correlated with growth, (iv) public savings are strongly positively correlated with growth, whereas correlation between private savings and growth is flat and statistically insignificant. These empirical facts contradict the conventional wisdom and constitute a challenge for the existing theories on upstream capital flows and global imbalances.