Foreign savings, insufficiency of demand, and low growth

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 over appreciated one - an exchange rate that assures the sustained character growth of aggregate demand. © 2008 M.E. Sharpe, Inc.