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Foreign savings, insufficiency of demand, and low growth

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  • Luiz Carlos Bresser-Pereira
  • Paulo Gala

Abstract

There is a problem of insufficiency of demand for countries that accept to grow with foreign savings. Although medium-income countries are capital-poor countries, current account deficits (foreign savings) will increase consumption rather than the rate of capital accumulation and aggregate demand. In consequence, the rate of substitution of foreign for domestic savings will be relatively high, and the country will become indebted to consume, not to invest and grow. Only when there are large investment opportunities, stimulated by a sizable difference between the expected profit rate and the long-term interest rate, will the marginal propensity to consume be low enough for the additional income originated from foreign capital flows to be used for investment rather than consumption. With this paper, the authors intend to contribute to the development macroeconomics approach to economic growth which emphasizes the need for a competitive exchange rate to promote growth, instead of an overap-preciated one—an exchange rate that assures the sustained character growth of aggregate demand.

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Bibliographic Info

Article provided by M.E. Sharpe, Inc. in its journal Journal of Post Keynesian Economics.

Volume (Year): 30 (2008)
Issue (Month): 3 (April)
Pages: 315-334

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Handle: RePEc:mes:postke:v:30:y:2008:i:3:p:315-334

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Web page: http://mesharpe.metapress.com/link.asp?target=journal&id=109348

Related research

Keywords: domestic savings; foreign savings; insufficiency of demand; low growth;

References

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  1. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
  2. Luiz Carlos Bresser-Pereira & Carmen Augusta Varela, 2004. "The second Washington consensus and Latin America's quasi-stagnation," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., M.E. Sharpe, Inc., vol. 27(2), pages 231-250, December.
  3. Sinn, Stefan, 1992. "Saving-Investment Correlations and Capital Mobility: On the Evidence from Annual Data," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 102(414), pages 1162-70, September.
  4. Barry Eichengreen & David Leblang, 2003. "Capital account liberalization and growth: was Mr. Mahathir right?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 8(3), pages 205-224.
  5. Coakley, Jerry & Kulasi, Farida & Smith, Ron, 1996. "Current Account Solvency and the Feldstein-Horioka Puzzle," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 106(436), pages 620-27, May.
  6. Pereira, Luiz Carlos Bresser, 2002. "Financiamento para o Subdesenvolvimento, o Brasil e o Segundo Consenso de Washington," Textos para discussão 119, Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil).
  7. Martin Feldstein & Charles Horioka, 1979. "Domestic Savings and International Capital Flows," NBER Working Papers 0310, National Bureau of Economic Research, Inc.
  8. Sebastian Edwards, 1995. "Why are Saving Rates so Different Across Countries?: An International Comparative Analysis," NBER Working Papers 5097, National Bureau of Economic Research, Inc.
  9. Fry, Maxwell J, 1978. "Money and Capital or Financial Deepening in Economic Development?," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 10(4), pages 464-75, November.
  10. Luiz Carlos Bresser-Pereira, 2002. "Brazil's Quasi-Stagnation and the Growth cum Foreign Savings Strategy," International Journal of Political Economy, M.E. Sharpe, Inc., vol. 32(4), pages 76-102, January.
  11. Reinhart, Carmen M. & Talvi, Ernesto, 1998. "Capital flows and saving in Latin America and Asia: a reinterpretation," Journal of Development Economics, Elsevier, Elsevier, vol. 57(1), pages 45-66, October.
  12. Pereira, Luiz Carlos Bresser & Nakano, Yoshiaki, 2002. "Economic Growth With Foreign Saving?," Textos para discussão 118, Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil).
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Citations

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Cited by:
  1. André Nassif & Carmem Feijó & Eliane Araújo, 2011. "The trend of the real exchange rate overvaluation in open emerging economies: the case of Brazil," Working Papers, Universidade Federal do Paraná, Department of Economics 0111, Universidade Federal do Paraná, Department of Economics.
  2. Pereira, Luiz Carlos Bresser, 2009. "From old to new developmentalism in latin America," Textos para discussão 193, Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil).
  3. Pereira, Luiz Carlos Bresser & Brito, Marcio Holland de, 2009. "Common currency and economic integration in mercosur," Textos para discussão 190, Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil).
  4. Vaqar Ahmed & Cathal O'Donoghue, 2010. "External Shocks in a Small Open Economy: A CGE - Microsimulation Analysis," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, Department of Economics, The Lahore School of Economics, vol. 15(1), pages 45-90, Jan-Jun.
  5. MASCA Simona-Gabriela & JUDE Cristina, 2009. "The Vicious Circle Of Fdi And Consumption In Romania," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 2(1), pages 417-423, May.

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