I wrote:
>1) Many developing countries have current account deficits which would
>imply accommodating capital account inflows...of course if everything
>freely flows."
>
>dlaw: I would consider whether the leakage of 3rd world savings into
other
>currencies depresses the market for capital goods.
You wrote:
"dlaw, thanks for the input. Certainly this is true. Investment must come from some saving source: either domestic or foreign. If domestic saving is low and there is very little foreign aid, foreign borrowing and foreign investment, there will be very little gross investment in the country.
Resource gap (gross domestic investment - gross domestic saving) values are high and increasing for low income countries:
Ethiopia 11 Mali 11 Tanzania 10 Ghana 10
The gaps in high income countries are obviously larger: UK, Japan, Germany are 1, -1, and -2 respectively. Large resource gaps have to be filled with something -- usually capital inflows from abroad. If foreign aid/borrowing/investment doesn't flow into the country, then the gap will surely close with decreased investment within. So I guess it's a story of either "filling" the gap or "closing" it."
I'm not sure I understand the "resource gap" number, but it seems to me that what we're trying to explain is why countries where there is apparently greater demand for investment than savings available should see their currencies beggared. Presumably, if moneys are flowing in from abroad, they must be converted to local currency in order to be invested, implying a greater demand for local currency than saved currency available. However, the currencies of such countries seem almost invariably to be out of demand, perpetually sinking into inflation.