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Public infrastructure, employment and sustainable growth in a small open economy with and without foreign direct investment

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  • Dipankar Dasgupta
  • Koji Shimomura

Abstract

The paper builds a theoretical model of endogenous growth motivated by the recent Indian paradox of an improving GDP growth rate in the face of unsatisfactory employment growth rate. The source of the problem is believed to be inadequate growth of manufacture for the absorption of unskilled or semi-skilled labour in rural sectors. The paper studies the impact of free trade on employment and GDP growth in a small, developing economy in the absence as well as presence of foreign direct investment. The model also recognizes the importance of public infrastructure accumulation to support the growth process. The results indicate that free trade with or without a corresponding free inflow of foreign capital into the manufacturing sector has a positive impact on employment and GDP growth. However, the beneficial effect is stronger in the presence of foreign capital. Foreign and domestic capital grow at equal rates in equilibrium.

Suggested Citation

  • Dipankar Dasgupta & Koji Shimomura, 2006. "Public infrastructure, employment and sustainable growth in a small open economy with and without foreign direct investment," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 15(3), pages 257-291.
  • Handle: RePEc:taf:jitecd:v:15:y:2006:i:3:p:257-291
    DOI: 10.1080/09638190600871586
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    References listed on IDEAS

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    1. Feenstra, Robert C., 1996. "Trade and uneven growth," Journal of Development Economics, Elsevier, vol. 49(1), pages 229-256, April.
    2. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, vol. 60(2), pages 323-351, March.
    3. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 103-126, October.
    4. Rivera-Batiz, Luis A. & Romer, Paul M., 1991. "International trade with endogenous technological change," European Economic Review, Elsevier, vol. 35(4), pages 971-1001, May.
    5. Cheng, Leonard K. & Qiu, Larry D. & Tan, Guofu, 2005. "Foreign direct investment and international trade in a continuum Ricardian trade model," Journal of Development Economics, Elsevier, vol. 77(2), pages 477-501, August.
    6. Krugman, Paul, 1979. "A Model of Innovation, Technology Transfer, and the World Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 87(2), pages 253-266, April.
    7. Turnovsky, Stephen J., 1997. "Fiscal Policy In A Growing Economy With Public Capital," Macroeconomic Dynamics, Cambridge University Press, vol. 1(03), pages 615-639, September.
    8. H. Oniki & H. Uzawa, 1965. "Patterns of Trade and Investment in a Dynamic Model of International Trade," Review of Economic Studies, Oxford University Press, vol. 32(1), pages 15-37.
    9. Luis A. Rivera-Batiz & Paul M. Romer, 1991. "Economic Integration and Endogenous Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 531-555.
    10. Trindade, Vitor, 2005. "The big push, industrialization and international trade: The role of exports," Journal of Development Economics, Elsevier, vol. 78(1), pages 22-48, October.
    11. Futagami, Koichi & Morita, Yuichi & Shibata, Akihisa, 1993. " Dynamic Analysis of an Endogenous Growth Model with Public Capital," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(4), pages 607-625, December.
    12. Dasgupta, Dipankar, 1999. "Growth versus welfare in a model of nonrival infrastructure," Journal of Development Economics, Elsevier, vol. 58(2), pages 359-385, April.
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    Citations

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    Cited by:

    1. Chandril Bhattacharyya, 2016. "A note on endogenous growth with public capital," Economics Bulletin, AccessEcon, vol. 36(4), pages 2506-2518.
    2. Aswini Kumar Mishra & Kunapareddy Narendra & Bibhu Prasad Kar, 2013. "Growth And Infrastructure Investment In India: Achievements, Challenges, And Opportunities," Economic Annals, Faculty of Economics, University of Belgrade, vol. 58(196), pages 51-70, January –.

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