Foreign Capital and Economic Growth

Brookings Papers on Economic Activity (Impact Factor: 3.41). 02/2007; 75(2007-1). DOI: 10.1353/eca.2007.0016
Source: RePEc

ABSTRACT Nonindustrial countries that have relied more on foreign finance have not grown faster in the long run as standard theoretical models predict. The reason may lie in these countries’ limited ability to absorb foreign capital, especially because their financial systems have difficulty allocating it to productive uses, and because their currencies are prone to appreciation (and often overvaluation) when such inflows occur. The current anomaly of poor countries financing rich countries may not really hurt the former’s growth, at least conditional on their existing institutional and financial structures. Our results do not imply that foreign finance has no role in development or that all types of capital naturally flow “uphill.” Indeed, the patterns associated with foreign direct investment flows have generally been more consistent with theoretical predictions. However, we find no evidence that providing financing in excess of domestic saving is the channel through which financial integration delivers its benefits.

Download full-text


Available from: Eswar S. Prasad, Jul 02, 2015
  • Source
    [Show abstract] [Hide abstract]
    ABSTRACT: Global imbalances are attributable to savings deficiency in some economies and savings glut in others. The recent global crisis has triggered widespread social conflict over income inequality. The inequality-saving link has again become a pressing issue needing serious attention. We present a new theory to explain why the link between inequality and saving is negative in OECD countries but positive in emerging Asia. We also offer an econometric analysis of differences in inequality-saving links between those economies. We find that aggressive financial services lead to a negative link by creating income illusion for overconsumption, but imperfect financial markets contribute to a positive link by interacting with industrial policies as part of growth strategies while ignoring liquidity constraints on consumption.
    World Economy 04/2014; 38(1). DOI:10.1111/twec.12188 · 0.69 Impact Factor
  • Source
    [Show abstract] [Hide abstract]
    ABSTRACT: This paper offers additional evidence on the structure of the inter-national financial network as emerging from the Coordinated Portfolio Investment Survey (CPIS) dataset collected by the IMF. Making use of blockmodeling techniques which allow us to fit a given community partition to real data, we show that the system is characterized by the presence of a particular type of meso-scale structure known as core-periphery, in which a densely connected subset of nodes (core) coexists with a sparsely connected partition (periphery), while the members of the core act as intermediaries between members of the periphery. The composition of the core -whose constituents are identified as the set of systemically-important international financial centers -is rather small and remains stable over time. In addition to very large economies playing host to well-known global financial centers, the core comprises several off-shore financial markets.
    04/2013; DOI:10.2139/ssrn.2250318
  • Source
    [Show abstract] [Hide abstract]
    ABSTRACT: In this study, Wald tests are carried out based on the method of Panel Granger and GMM to determine whether the causal relationship between economic growth and current budget deficit, short-term capital flows in 20 OECD countries for the period 1990-2010. Also SURADF and CADF testing was performed with the CDLM to test the stationary for these three variables. As a result of the panel causality tests, it has been determined a causal relationship from the current account deficit and short-term capital flows towards economic growth and from the current account deficit towards the short-term capital.
    Journal of Applied Economic Sciences 12/2012; VII(4(22)):334-344.