Can Countries Rely on Foreign Saving for Investment and Economic Development?

Eduardo Cavallo, Barry Eichengreen and Ugo Panizza

No 07-2016, IHEID Working Papers from Economics Section, The Graduate Institute of International Studies

Abstract: A surprisingly large number of countries have been able to finance a significant fraction of domestic investment using foreign finance for extended periods. While many of these episodes are in low-income countries where official finance is more important than private finance, we also identify a number of episodes where a substantial fraction of domestic investment was financed via private capital inflows. That said, we find that foreign savings are not a good substitute for domestic savings. More often than not, episodes of large and persistent current account deficits do not end happily. Rather, they end abruptly with compression of the current account, real exchange rate depreciation, and a sharp slowdown in investment. We conclude that financing growth and investment out of foreign savings, while not impossible, is risky.

Keywords: Current account; Growth; Volatility; Savings (search for similar items in EconPapers)
JEL-codes: F32 O16 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2016-07-15
New Economics Papers: this item is included in nep-ifn and nep-opm
References: View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Can countries rely on foreign saving for investment and economic development? (2018)
Working Paper: Can Countries Rely on Foreign Saving for Investment and Economic Development? (2016)
Working Paper: Can Countries Rely on Foreign Saving for Investment and Economic Development? (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:gii:giihei:heidwp07-2016

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