Foreign Capital, Growth and Savings: Implications of a Simultaneous Equations Approach

Abstract

In the previous two chapters we reviewed some of the existing literature about the effects of foreign capital inflows on growth rates and savings rates. However, all of these studies, including our own results, concentrate only on the direct effects of these inflows. In this chapter we show that once we allow for their indirect effects, two major conclusions follow. First, the single equation models exaggerate the positive effects of capital inflows on growth and the negative effect on savings rate. Second, the findings so far could even be misleading in view of the fact that in the simultaneous equations approach we cannot rule out the possibility that the total effect (direct plus indirect) of capital inflows on savings rates may well be positive. In order to further highlight the significance of this approach, we will also compare the direct and total effects of dependency rates on savings rate, since this variable has emerged as one of the more significant determinants and has generated considerable attention and controversy (see Leff [41] and Gupta [31,33]).KeywordsTotal EffectDependency RateSaving RateForeign CapitalCapital InflowThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.