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Foreign savings, insufficiency of demand, and low growth

  • Luiz Carlos Bresser-Pereira
  • Paulo Gala

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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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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  1. 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.
  2. Fry, Maxwell J, 1978. "Money and Capital or Financial Deepening in Economic Development?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 10(4), pages 464-75, November.
  3. Martin Feldstein & Charles Horioka, 1979. "Domestic Savings and International Capital Flows," NBER Working Papers 0310, National Bureau of Economic Research, Inc.
  4. 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., vol. 27(2), pages 231-250, December.
  5. Reinhart, Carmen & Talvi, Ernesto, 1998. "Capital flows and saving in Latin America and Asia: A reinterpretation," MPRA Paper 13704, University Library of Munich, Germany.
  6. 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.
  7. Leonardo Leiderman & Carmen Reinhart & Guillermo Calvo, 1992. "Capital Inflows and Real Exchange Rate Appreciation in Latin America; The Role of External Factors," IMF Working Papers 92/62, International Monetary Fund.
  8. Coakley, Jerry & Kulasi, Farida & Smith, Ron, 1996. "Current Account Solvency and the Feldstein-Horioka Puzzle," Economic Journal, Royal Economic Society, vol. 106(436), pages 620-27, May.
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  10. Sinn, Stefan, 1992. "Saving-Investment Correlations and Capital Mobility: On the Evidence from Annual Data," Economic Journal, Royal Economic Society, vol. 102(414), pages 1162-70, September.
  11. 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).
  12. 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).
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