Capital Mobility—a resource curse or blessing? How, when, and for whom?

This paper investigates which of the two types of countries—resource-rich or resource-poor—gains from capital market integration and capital tax competition. We develop a framework involving vertical linkages through resource-based inputs as well as international fiscal linkages between resource-rich and resource-poor countries. Our analysis shows that capital market integration causes capital flows from the latter to the former and thus improves production efficiency and global welfare. However, such gains accrue only to resource-poor countries, and capital mobility might even negatively affect resource-rich countries. In response to capital flows, the governments of both types of countries have an incentive to tax capital. We thus conclude that such taxation enables resource-rich countries to exploit their efficiency gains through capital market integration and become winners in the tax game.