Dani Rodrik writes:
Why Did Financial Globalization not Deliver the Goods?
‘Cause let’s face it, it didn’t. It didn’t boost investment and growth in emerging market economies; it led to increased volatility; and it played an important supporting role in the current subprime mortgage mess.
I have a new paper with Arvind Subramanian which scrutinizes the reasons.
[Long quote omitted]
The paper does two things. First, it evaluates and critiques the latest generation of work in favor of financial globalization–mainly the writings of Rick Mishkin, Peter Henry, and Kose, Prasad. Rogoff, and Wei. Second, it argues that we need to understand the difference between saving- and investment-constrained economies in order to make sense of financial globalization. In investment-constrained economies–where investment is low not because of poor access to credit but because of low perceived return–capital inflows are at best ineffective, at worst harmful.
The distinction between saving- and investment-constrained economies is indeed important. The question I have is, how do you become an investment-constrained economy in the first place? Is it pure and simple financial repression, or are there any other factors at work?