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Immiserizing Capital Flows to Developing Countries

  • Bender, Dieter
  • Loewenstein, Wilhelm

Based on a neoclassical growth model for open low income economies this paper shows that development strategies, which rely on net borrowing abroad lead to a position of sustainable foreign indebtedness (provided that all capital imports are used for investment financing), but turn out to be immiserizing. The paper proves that development financing by foreign loans is either ineffective in terms of increasing per capita income but associated by sustainable foreign debts, or the effectiveness is bought at the price of growing into unsustainable debt positions. The first option is stable but counterproductive. The second option is effective but unstable.

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Paper provided by Institut fuer Entwicklungsforschung und Entwicklungspolitik, Ruhr-Universitaet Bochum in its series IEE Working Papers with number 201.

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Length: 24 pages
Date of creation: 2014
Date of revision:
Handle: RePEc:bom:ieewps:201
Contact details of provider: Postal: Institute of Development Research and Development Policy, Ruhr University Bochum, Universitaetsstr. 150, D-44801 Bochum, Germany
Phone: +49.234.32-22418
Fax: +49.234.3214-294
Web page: http://www.development-research.org/
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  1. Aizenman, Joshua & Pinto, Brian & Radziwill, Artur, 2007. "Sources for financing domestic capital - Is foreign saving a viable option for developing countries?," Journal of International Money and Finance, Elsevier, vol. 26(5), pages 682-702, September.
  2. Burnside, Craig & Dollar, David, 1997. "Aid, policies, and growth," Policy Research Working Paper Series 1777, The World Bank.
  3. Hendricks, Lutz, . "Equipment Investment and Growth In Developing Countries," Working Papers 97/5, Arizona State University, Department of Economics.
  4. Barro, Robert J & Mankiw, N Gregory & Sala-i-Martin, Xavier, 1995. "Capital Mobility in Neoclassical Models of Growth," American Economic Review, American Economic Association, vol. 85(1), pages 103-15, March.
  5. Hansen, Henrik & Tarp, Finn, 2001. "Aid and growth regressions," Journal of Development Economics, Elsevier, vol. 64(2), pages 547-570, April.
  6. Maurice Obstfeld, 2009. "International Finance and Growth in Developing Countries: What Have We Learned?," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 63-111, April.
  7. Lee, Jong-Wha, 1995. "Capital goods imports and long-run growth," Journal of Development Economics, Elsevier, vol. 48(1), pages 91-110, October.
  8. Carl-Johan Dalgaard & Henrik Hansen & Finn Tarp, 2001. "On the Empirics of Foreign Aid and Growth," EPRU Working Paper Series 03-13, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics, revised Sep 2003.
  9. William Easterly, 2003. "Can Foreign Aid Buy Growth?," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 23-48, Summer.
  10. Jeffrey D. Sachs & Andrew Warner, 1995. "Economic Reform and the Process of Global Integration," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1, 25th A), pages 1-118.
  11. Bacha, Edmar L., 1990. "A three-gap model of foreign transfers and the GDP growth rate in developing countries," Journal of Development Economics, Elsevier, vol. 32(2), pages 279-296, April.
  12. Martin Feldstein & Charles Horioka, 1979. "Domestic Savings and International Capital Flows," NBER Working Papers 0310, National Bureau of Economic Research, Inc.
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