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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. Dalgaard, Carl-Johan & Hansen, Henrik & Tarp, Finn, 2002. "On the Empirics of Foreign Aid and Growth," MPRA Paper 63696, University Library of Munich, Germany.
  2. 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.
  3. Hendricks, Lutz, . "Equipment Investment and Growth In Developing Countries," Working Papers 97/5, Arizona State University, Department of Economics.
  4. Hansen, Henrik & Tarp, Finn, 2001. "Aid and growth regressions," Journal of Development Economics, Elsevier, vol. 64(2), pages 547-570, April.
  5. Jong-Wha Lee, 1994. "Capital Goods Imports and Long-Run Growth," NBER Working Papers 4725, National Bureau of Economic Research, Inc.
  6. Aizenman, Joshua & Pinto, Brian & Radziwill, Artur, 2004. "Sources for Financing Domestic Capital - is Foreign Saving a Viable Option for Developing Countries?," Santa Cruz Department of Economics, Working Paper Series qt7g18546z, Department of Economics, UC Santa Cruz.
  7. Barro, R.J. & Mankiw, N.G. & Sala-i-Martin, X., 1992. "Capital Mobility in Neoclassical Models of Growth," Papers 655, Yale - Economic Growth Center.
  8. William Easterly, 2003. "Can Foreign Aid Buy Growth?," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 23-48, Summer.
  9. Burnside, Craig & Dollar, David, 1997. "Aid, policies, and growth," Policy Research Working Paper Series 1777, The World Bank.
  10. Jeffrey Sachs & Andrew Warner, 1995. "Economic Reform and the Progress of Global Integration," Harvard Institute of Economic Research Working Papers 1733, Harvard - Institute of Economic Research.
  11. Martin Feldstein & Charles Horioka, 1979. "Domestic Savings and International Capital Flows," NBER Working Papers 0310, National Bureau of Economic Research, Inc.
  12. 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.
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