The Rest Beyond the West
Edited by Vladimir Popov and Piotr Dutkiewicz
Chapter 5: Why the ‘Rest’ doesn’t need foreign finance
The ‘Rest’ will only be able to catch up and grow more than the West if it goes against a ‘received truth’: capital-rich countries should transfer their capitals to capital-poor countries. This is intuitively the truth, and the mantra that the West uses to occupy the markets of developing countries with their finance and their multinationals. Yet, new developmentalism tells us that developing countries will invest (and save) more if their current account is balanced, if not showing a surplus. Starting from a balanced current account, the decision to incur in deficits or grow cum ‘foreign savings’ – actually, foreign finance – will appreciate the exchange rate in the long term and discourage investment. In consequence, we will have a high rate of substitution of foreign for domestic savings, and foreign finance will finance consumption, not investment. Yet, developing countries have difficulty realizing this, first, because the West and their economists are adamant in recommending current account deficits; second, because such policies are consistent with a high preference for immediate consumption; and third, because economists in developing countries are unable to criticize the ‘growth cum foreign savings policy’.
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