Economic growth with foreign savings?
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 liber- alization 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 sol- vency 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.
JEL Classification: O11; F43.
Keywords: Development foreign savings current-account deficit capital flows