One thought on “Noah Smith on the Sri Lankan crisis”

  1. Nothing new in what he wrote.

    If anything, I’d cut down most of his comments to just a few paragraphs: countries with low savings have to run concurrent deficits in their balance of payments. There are a number of ways to fund yawning current account deficits: FDI or FII. The latter is often referred to as “hot money”, i.e. portfolio flows. Easy come, easy go. FDI is “sticky” and therefore more suitable.

    However, FDI still means that foreigners get a piece of your country’s economy. Sometimes this makes sense if it’s productive FDI, i.e. export-oriented. But a lot of FDI isn’t, and is simply buying up unproductive and domestic-oriented business. If they send profits abroads, that means it will pressurise your currency also since they have to exchange the local currency to USD/euro etc.

    For these reasons, East Asians economies have defied neoliberal theory and consistently advocated very high savings rates. That way, you can fund high investments without borrowing from abroad. (A current account balance is defined as S-I, or savings minus investments).

    The moral of the story is: have high savings rates and run current account surpluses as a developing country. Accept FDI but only in a few select export-oriented sectors. That’s what Korea, Taiwan and China did. Junk neoliberal theory and read Ha-Joon Chang.

    (Yes, there were of course many other mistakes made, but this kind of massive crisis is only possible if you have a balance of payments crisis. India had a close call in the early 1990s for very similar reasons).

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