Luiz Carlos Bresser-Pereira
This paper, written in 2006, served of basis to chapter 7 of Developing Brazil, 'Overappreciation and foreign changes' Boulder: Lynne Rienners Publishers, 2009): 149-176.

The Brazilian economy was able to put an end to high inertial inflation in 1994, but, despite the large inflows of capital received in the form of finance and direct investment, the country remained quasi-stagnant. A central explanation for it was the opening of the capital account and the adoption of growth with foreign savings strategy. In this paper, the focus is in the exchange rate which tends to become overvalued in consequence of such strategy. The paper shows that the perverse effects of such strategy operate in three stages: first, substitution of foreign for domestic savings; second, indebtedness and financial dependency of the country; and finally, balance of payment crisis. After that the paper concentrates in the first stage: summarizes the critique of the growth cum foreign savings strategy into a model, defines the rate of substitution of foreign for domestic savings that takes place when current account deficits are increasing, and its inverse. Finally, it offers a simple measure of both rates for Brazil, in the 1990s, when the country was receiving foreign savings, and in the 2000s, when the inverse happened.