Globalization and Economic Development
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Globalization and Economic Development

Essays in Honour of J. George Waardenburg

Edited by Servaas Storm and C. W.M. Naastepad

Globalization is widely regarded as a means not only of ensuring efficiency and growth, but also of achieving equity and development for those countries operating in the global economy. The book argues that this perception of globalization as the road to development has lost its lustre. The experience of the 1990s belied expectation of the gains, such as faster growth and reduced poverty, which could be achieved through closer integration in the world economy.
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Chapter 7: An analysis of the impact of short-term capital flows on income in developing countries

Amit Bhaduri


7. An analysis of the impact of shortterm capital flows on income in developing economies Amit Bhaduri Keynes’ as well as Kalecki’s analysis of the problem of income determination through aggregate demand was set, almost self-consciously, in the context of a closed economy. The generalization of this analysis to an economy open to foreign trade through various ramifications of the ‘foreign trade multiplier’ has one common thread running through it. Imports, like savings, are assumed to be induced by income. Thus, with both savings and imports as increasing functions of income, the effect of the foreign trade multiplier on aggregate demand is derived in terms of the saving and import propensities as the two sources of leakage from demand. With capital inflow in the liberalized regime of trade and finance in a developing country, the problem needs to be viewed somewhat differently. Capital inflow is an autonomous variable decided by private traders in the international foreign exchange market. In many situations relevant to developing countries, we may plausibly postulate that higher imports, and therefore a higher trade deficit, are not only sustained but driven by the volume of autonomous capital inflows into a country. Thus, in contrast to the more traditional Keynesian model, imports may be assumed to be induced not by income but by capital inflow. Its consequence is evident. A higher capital inflow in a liberalized trade regime permits sustaining a higher trade deficit, which in turn has...

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