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Education, Growth, and Redistribution in the Presence of Capital Flight

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Author Info
Debajyoti Chakrabarty
Abstract

We construct an overlapping generations model to study the effect of capital controls on human capital investments and the incidence of redistributive politics in a growing economy. We argue that the conventional wisdom linking higher capital controls to lower growth is reproduced only when an economy is sufficiently developed. For under-developed countries, higher capital controls are beneficial for human capital accumulation suggesting that the wisdom does not apply. In an augmented version of the model, we show that a modern sector, characterized by positive levels of investment in education, may not exist unless capital controls are sufficiently high. In particular, higher capital controls make it feasible for a modern sector to exist by lowering the threshold income level required by workers to invest in human capital. These results are consistent with recent evidence suggesting that capital account liberalization positively affects growth only after a country has achieved a certain threshold level of absorptive capacities.

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Paper provided by Max Planck Institute of Economics, Entrepreneurship, Growth and Public Policy Group in its series Papers on Entrepreneurship, Growth and Public Policy with number 2006-21.

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Length: 34 pages
Date of creation: Sep 2006
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Handle: RePEc:esi:egpdis:2006-21

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Related research
Keywords: Capital Flight; Economic Growth; Human Capital; Income Distribution; Long Term Capital Movements; Optimal Taxation;

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Find related papers by JEL classification:
D33 - Microeconomics - - Distribution - - - Factor Income Distribution
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
O19 - Economic Development, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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