Capital mobility and underdevelopment traps

In a two-country model with threshold effects, we study the robustness of underdevelopment traps to capital mobility. It is shown that capital mobility can make a country cross the threshold and bifurcate toward sustained growth, subject to household expectations. Another result is, however, that a...

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Bibliographic Details
Published in:Journal of development economics 2003-08, Vol.71 (2), p.435-462
Main Author: Vellutini, Charles
Format: Article
Language:English
Subjects:
Agricultural and food market
Capital mobility
Capital movement
Development economics
Development policy
Development studies
Development threshold
Economic development
Economic models
Studies
Underdevelopment
Underdevelopment traps
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Summary:In a two-country model with threshold effects, we study the robustness of underdevelopment traps to capital mobility. It is shown that capital mobility can make a country cross the threshold and bifurcate toward sustained growth, subject to household expectations. Another result is, however, that a multiplicity of growth patterns such as long-run divergence and convergence clubs can co-exist with perfect capital mobility, hence with an identical rate of return across countries. In this model, efficient development policies are a combination of, first, liberalization—as capital mobility makes growth possible—and, second, government intervention coordinating expectations into self-fulfilling growth beliefs.
ISSN:0304-3878
1872-6089
DOI:10.1016/S0304-3878(03)00036-1