CAPITAL FLOWS AND SAVING IN LATIN-AMERICA AND ASIA - A REINTERPRETATION

Both theory and the empirical evidence for a broad range of countries have identified a negative relationship between domestic and foreign s aving. Still, based on the experience of the 1990s, a popular view has emerged that domestic and foreign saving are positively related in As ia and negatively related in Latin America. We argue that this popular discussion does not discriminate between trends in domestic saving (w hich are very different in the two regions) and the cyclical component of saving, which is linked to capital flows. We show that, when trend and cyclical components of domestic saving and capital flows are prop erly taken into account, the two regions do not differ in the short-ru n response of domestic saving to capital inflows. We conclude that the main differences pertain to the long-run behavior of saving rates, wh ich are driven by trends in demographic factors, per capita GDP, and o ther factors that have little to do with fluctuations in capital flows . (C) 1998 Elsevier Science B.V. All rights reserved.