Abstract
The neoclassical growth model, in both its basic and its augmented version, provides an optimistic view of the consequences of capital movements for a developing economy: as foreign inflows are used to finance investment in physical capital, opening to capital mobility should make a developing country (DC) an attractive location for international investors (provided it is endowed with, and will accumulate, enough human capital according to the augmented model with partial mobility). Consequently, the main predictions of the neoclassical theory are that:
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First, the integration in international capital markets will foster the speed of convergence to the steady state and therefore raise the growth rate for those developing economies that become net capital importers.
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Second, the larger the (per capita) inflow of net foreign capital, the higher the ex ante marginal product of capital hence the more the underlying fundamentals of a DC are conducive to economic growth (see Section 4.1).
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Notes and References
In the case of De Gregorio (1992) one is led to think that he refers to FDI; in the case of Cohen (1994) the reader is led to identify ‘foreign finance’ with the accumulation of foreign debt.
See Reynolds (1983, p. 962).
However, Durlauf and Quah (1998, p. 45) criticise this robustness criterion.
Other right-hand-side variables such as the size of the government, the average inflation rate, measures of terms of trade variability and economic distortions, do not enter significantly into the regressions.
As in Chapter 6 we proxy the dependency rate with the share of young over total population, excluding the elderly share on which the evidence produced by Bloom and Williamson (1997) is weak.
Once one controls for the initial dependency rate and its change over time, the expected sign of the coefficient of the rate of growth of population is positive according to Bloom and Williamson (1997).
Moreover, multicollinearity problems may arise in this case.
Of course, one could argue that thirteen years are not enough to test for demographic effects; note, however, that Bloom and Williamson (1997) stress the transitional, not the steady-state features of their approach.
Boone (1996) also performs robustness tests.
This is consistent with ‘demographic’-growth models if the decline in average dependency rates in Asia during the 1970s led to higher rates of investment (and saving).
See Section 8.3 for a study of foreign debt sustainability in Central and Eastern Europe.
The correlation coefficients between the change in investment and consumption rates, on the one side, and capital inflows, on the other, are all about 0.15 in 1983–8.
Note, however, that government consumption is not accounted for in the coordination-failure framework of Section 4.3.
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© 1999 Stefano Manzocchi
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Manzocchi, S. (1999). Capital Movements, Economic Growth and Investment in Developing Countries. In: Foreign Capital in Developing Economies. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-27620-2_7
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DOI: https://doi.org/10.1007/978-1-349-27620-2_7
Publisher Name: Palgrave Macmillan, London
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