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Fault Lines by Raghuram G. Rajan

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CHAPTER THREE

Flighty Foreign Financing

IN THE 1980S AND 1990S, surpluses produced by exporters like Germany and Japan were looking for markets.1 Poorer developing countries, with low levels of per capita consumption and investment, were ideal candidates for boosting their spending, provided they could get financing. In fact, even though they too focused on producing for export markets, a number of developing countries, like Korea, invested a lot as they grew, importing substantial quantities of raw material, capital goods, and machinery. In doing so, they ran large trade deficits and helped absorb the surpluses.

Developing countries had to borrow from abroad to finance the difference between what they spent (their consumption plus their investment) ...

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