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Sources for Financing Domestic Capital – is Foreign Saving a Viable Option for Developing Countries?

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Author Info

  • Aizenman, Joshua
  • Pinto, Brian
  • Radziwill, Artur

Abstract

This paper proposes a new method for measuring the degree to which the domestic capital stock is self-financed. The main idea is to use the national accounts to construct a self-financing ratio, indicating what would have been the stock of tangible capital supported by actual past national saving, relative to the actual stock of capital. We use the constructed measure of self-financing to evaluate the impact of the growing global financial integration on the sources of financing domestic capital stocks in developing countries. On average, 90% of the stock of capital in developing countries is self-financed, and this fraction was surprisingly stable throughout the 1990s. The greater integration of financial markets has not changed the dispersion of self-financing rates, and the correlation between changes in de-facto financial integration and changes in self-financing ratios is statistically insignificant. There is no evidence of any “growth bonus†associated with increasing the financing share of foreign savings. In fact, the evidence suggests the opposite: throughout the 1990s, countries with higher self-financing ratios grew significantly faster than countries with low self-financing ratios. This result persists even after controlling growth for the quality of institutions. We also find that higher volatility of the self-financing ratios is associated with lower growth rates, and that better institutions are associated with lower volatility of the self-financing ratios. These findings are consistent with the notion that financial integration may have facilitated diversification of assets and liabilities, but failed to offer new net sources of financing capital in developing countries.

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Bibliographic Info

Paper provided by Department of Economics, UC Santa Cruz in its series Santa Cruz Department of Economics, Working Paper Series with number qt31n8m3bt.

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Date of creation: 01 Aug 2004
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Handle: RePEc:cdl:ucscec:qt31n8m3bt

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Related research

Keywords: financial integration; self-financing; diversification; saving; investment;

References

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  1. Pierre-Olivier Gourinchas & Olivier Jeanne, 2006. "The Elusive Gains from International Financial Integration," Review of Economic Studies, Oxford University Press, vol. 73(3), pages 715-741.
  2. Linda L. Tesar & Rene M. Stulz & Stephen Friedman & George N. Hatsopoulos, 1999. "The Role of Equity Markets in International Capital Flows," NBER Chapters, in: International Capital Flows, pages 235-306 National Bureau of Economic Research, Inc.
  3. Aart Kraay & Norman Loayza & Luis Servén & Jaume Ventura, 2005. "Country Portfolios," Journal of the European Economic Association, MIT Press, MIT Press, vol. 3(4), pages 914-945, 06.
  4. Ashoka Mody & Antu Panini Murshid, 2002. "Growing Up with Capital Flows," IMF Working Papers 02/75, International Monetary Fund.
  5. Kenneth Rogoff & Charles Wyplosz, 1999. "International Seminar on Macroeconomics," NBER Books, National Bureau of Economic Research, Inc, number rogo99-1, October.
  6. Coakley, Jerry & Kulasi, Farida & Smith, Ron, 1998. "The Feldstein-Horioka Puzzle and Capital Mobility: A Review," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 3(2), pages 169-88, April.
  7. Philip Lane & Gian Maria Milesi-Ferretti, 2001. "THE EXTERNAL WEALTH OF NATIONS: Measures of Foreign Assets and Liabilities For Industrial and Developing Countries," Trinity Economics Papers, Trinity College Dublin, Department of Economics 20014, Trinity College Dublin, Department of Economics.
  8. Martin Feldstein & Charles Horioka, 1979. "Domestic Savings and International Capital Flows," NBER Working Papers 0310, National Bureau of Economic Research, Inc.
  9. Joshua Aizenman, 2002. "Financial Opening: Evidence and Policy Options," NBER Working Papers 8900, National Bureau of Economic Research, Inc.
  10. Michael P. Dooley, 1988. "Capital Flight: A Response to Differences in Financial Risks," IMF Staff Papers, Palgrave Macmillan, vol. 35(3), pages 422-436, September.
  11. Barry P. Bosworth & Susan M. Collins, 1999. "Capital Flows to Developing Economies: Implications for Saving and Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(1), pages 143-180.
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Cited by:
  1. Aizenman, Joshua & Jinjarak, Yothin & Park, Donghyun, 2011. "Capital flows and economic growth in the era of financial integration and crisis, 1990-2010," Santa Cruz Department of Economics, Working Paper Series qt3003w1qd, Department of Economics, UC Santa Cruz.
  2. Naeem Akram, 2013. "Empirical examination of debt and growth nexus in South Asian countries," Asia-Pacific Development Journal, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), vol. 20(2), pages 29-52, December.
  3. Abdullahi Ahmed & Andrew Hulten, 2014. "Financial Globalization in Botswana and Nigeria: A Critique of the Thresholds Paradigm," The Review of Black Political Economy, Springer, Springer, vol. 41(2), pages 177-203, June.

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