Education, Growth, and Redistribution in the Presence of Capital Flight

Areendam Chanda, Chetan Ghate, Debajyoti Chakrabarty

Research output: Contribution to journalArticleResearchpeer-review

Abstract

We construct an overlapping generations model to study the effect of capital controls on human capital investments and the incidence of redistributive taxation in a growing economy. We argue that the conventional wisdom linking higher capital controls to lower growth is reproduced only when an economy is sufficiently developed. For under-developed countries, higher capital controls are beneficial for human capital as well as domestic physical capital accumulation suggesting that the conventional wisdom does not apply. In an augmented version of the model, we show that a modern sector characterized by positive levels of investment in education may not exist unless capital controls are sufficiently high. Higher capital controls make it feasible for a modern sector to exist by lowering the threshold income level required by workers to invest in human capital. Our results are consistent with recent evidence suggesting that capital account liberalization positively affects growth only after a country has achieved a certain threshold level of absorptive capacities.
Original languageEnglish
JournalThe BE Journal of Macroeconomics
Volume6
Issue number2
DOIs
Publication statusPublished - Aug 2006

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Redistribution
Education
Capital controls
Capital flight
Wisdom
Human capital
Capital account liberalization
Workers
Income level
Physical capital
Absorptive capacity
Overlapping generations model
Redistributive taxation
Human capital investment
Capital accumulation
Developed countries

Cite this

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abstract = "We construct an overlapping generations model to study the effect of capital controls on human capital investments and the incidence of redistributive taxation in a growing economy. We argue that the conventional wisdom linking higher capital controls to lower growth is reproduced only when an economy is sufficiently developed. For under-developed countries, higher capital controls are beneficial for human capital as well as domestic physical capital accumulation suggesting that the conventional wisdom does not apply. In an augmented version of the model, we show that a modern sector characterized by positive levels of investment in education may not exist unless capital controls are sufficiently high. Higher capital controls make it feasible for a modern sector to exist by lowering the threshold income level required by workers to invest in human capital. Our results are consistent with recent evidence suggesting that capital account liberalization positively affects growth only after a country has achieved a certain threshold level of absorptive capacities.",
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Education, Growth, and Redistribution in the Presence of Capital Flight. / Areendam Chanda; Chetan Ghate ; Chakrabarty, Debajyoti.

In: The BE Journal of Macroeconomics, Vol. 6, No. 2, 08.2006.

Research output: Contribution to journalArticleResearchpeer-review

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