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?
Claude Bismut
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.
Claude Bismut
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.
Claude Bismut
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.
Claude Bismut
Global Convergence Scenarios, OECD Workshop, Jan. 16,2006
Essence of the neoclassical argument
Y
K
Two countries, DC and LDC, have the same neoclassical
production function, ...
Claude Bismut
Global Convergence Scenarios, OECD Workshop, Jan. 16,2006
Essence of the neoclassical argument
Y
K
Less developped
country
Developped
country
…, but, initially, DC is much more capital intensive than LDC.
Claude Bismut
Global Convergence Scenarios, OECD Workshop, Jan. 16,2006
Essence of the neoclassical argument
Y
K
Less developped
country
Developped
country
Two domestic capital markets: neoclassical theory predicts
convergence in the long run.
Claude Bismut
Global Convergence Scenarios, OECD Workshop, Jan. 16,2006
Essence of the neoclassical argument
Y
K
Less developped
country
Developped
country
Merge the two capital markets in a unique global one: then,
savings move rapidly from DC to LDC.
Claude Bismut
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.
Claude Bismut
Global Convergence Scenarios, OECD Workshop, Jan. 16,2006
Less developed countries : net capital inflows
140
Foreign portfolio investment
Foreign direct investment
120
100
80
60
40
20
0
1970
Claude Bismut
1974
1978
1982
1986
1990
1994
1998
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.
Claude Bismut
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.
Claude Bismut
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.
Claude Bismut
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.
Claude Bismut
Global Convergence Scenarios, OECD Workshop, Jan. 16,2006
Convergence
is at work
Claude Bismut
Global Convergence Scenarios, OECD Workshop, Jan. 16,2006
Concluding remarks :
Strategy for growth and convergence
Claude Bismut
Global Convergence Scenarios, OECD Workshop, Jan. 16,2006