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Economic growth with foreign savings?

Bresser-Pereira and Yoshiaki Nakano

Brazilian Journal of Political Economy, 22 (2):3-27. Paper presented to the Seventh International Post Keynesian Workshop, "Fighting Recession in a Globalized World: Problems of Developed and Developing Countries" Kansas City, Missouri, June 28 - July 3, 2002.

Abstract. Highly indebted countries, particularly the Latin American ones, presented dismal economic outcomes in the 1990s, which are the consequence of the 'growth cum foreign savings strategy', or the Second Washington Consensus. Coupled with liberalization of international financial flows, such strategy, which did not make part of the first consensus, led the countries, in the wave of a new world wide capital flow cycle, to high current account deficits and increase in foreign debt, ignoring the solvency constraint and the debt threshold. In practical terms it involved overvalued currencies (low exchange rates) and high interest rates; in policy terms, the attempt to control de budget deficit while the current account deficit was ignored. The paradoxical consequence was the adoption by highly indebted countries of 'exchange rate populism', a less obvious but more dangerous form of economic populism.