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## Long-Run Growth and International Saving Flows

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**Long-Run Growth and International Saving Flows**Claude BISMUT University Montpellier-I**Globalization from goods to capital markets**• Together with trade liberalization, the integration of capital markets has been one of the major long-run trends of the world economy over the last sixty years. • It was believed to foster growth, in particular in developing countries, thus speeding up convergence. • What can we reasonably expect from capital market integration? • Has it worked as expected? • How could the outcome of this process be improved? Global Convergence Scenarios, OECD Workshop, Jan. 16,2006**I. What can we expect from international financial**integration? • Welfare increasing? Because households have a larger choice. • Speeding convergence? Because foreign saving can supplement insufficient domestic resource for investing in less developed countries. • More growth? Because market forces enhance private efficiency and government discipline. Global Convergence Scenarios, OECD Workshop, Jan. 16,2006**1. Consumption smoothing**Integrated capital markets allow to smooth consumption against asymmetric shocks. • A country can borrow in bad times and lend in good times. • Aging countries can transfer savings to young countries. • Consumption smoothing is welfare increasing • Current account deficits are not a concern, if sustainable. • On average, does not lead to faster growth. Global Convergence Scenarios, OECD Workshop, Jan. 16,2006**2. Financial integration and convergence**• Open domestic capital markets, savings will move from low to high return places. • This does not change the long run rate of growth but speeds up convergence. Global Convergence Scenarios, OECD Workshop, Jan. 16,2006**Essence of the neoclassical argument**• Two countries, DC and LDC, have the same neoclassical production function, ... Global Convergence Scenarios, OECD Workshop, Jan. 16,2006**Essence of the neoclassical argument**…, but, initially, DC is much more capital intensive than LDC. Global Convergence Scenarios, OECD Workshop, Jan. 16,2006**Essence of the neoclassical argument**Two domestic capital markets: neoclassical theory predicts convergence in the long run. Global Convergence Scenarios, OECD Workshop, Jan. 16,2006**Essence of the neoclassical argument**Merge the two capital markets in a unique global one: then, savings move rapidly from DC to LDC. Global Convergence Scenarios, OECD Workshop, Jan. 16,2006**3 Factors enhancing growth**Foreign investment bears the seeds of efficiency gains. • FDI favors transfers of technology and importation of management practices. • Portfolio investment accelerates the development of the equity market. • Governments are subject to markets’ judgement, which enhances discipline. • Opening the current account is also expected to increase the efficiency of domestic banks. • However capital flows must be directed toward productive investments. Global Convergence Scenarios, OECD Workshop, Jan. 16,2006**Less developed countries : net capital inflows**Global Convergence Scenarios, OECD Workshop, Jan. 16,2006**II. Has financial integration delivered its expected**benefits? • Financial opening does not necessarily bring about more convergence or more growth. • Current account imbalances are not a concern if countries remain solvent. • Catching-up works on average, but not for all LDC. Global Convergence Scenarios, OECD Workshop, Jan. 16,2006**1 Is the internationalization of savings actually at work?**Disconnection between saving and investment • Close correlation found between saving and investment in the 80s and early 90s raised doubts on capital mobility. • One reason is that governments have implemented macro policies to contain current account deficits. • More recent evidence indicates that investment and saving have actually been disconnected, and that internationalization of savings is at work. Global Convergence Scenarios, OECD Workshop, Jan. 16,2006**2 Who’s afraid of current account imbalances?**Current account imbalances have to be accepted do not automatically lead to convergence. • Opening the current account and refusing deficit is somewhat contradictory. • But deficit have to be sustainable. • Governments are under markets judgement, and fear financial crises and sharp exchange rate corrections. • Sound macroeconomic policy is crucial. • But faster convergence will not necessarily follow. Global Convergence Scenarios, OECD Workshop, Jan. 16,2006**3 Has the convergence process been effective?**At work on average, but not for all. • Some economies -- notably in transition -- have benefited from globalization. • Less developed countries still have too limited access to capital markets. • However, there is some evidence of negative correlation between growth and income per head. • But too many countries remain trapped in a vicious circle. Global Convergence Scenarios, OECD Workshop, Jan. 16,2006**Convergence is at work**Global Convergence Scenarios, OECD Workshop, Jan. 16,2006**Concluding remarks :Strategy for growth and convergence**Global Convergence Scenarios, OECD Workshop, Jan. 16,2006