The Effects of Export-Oriented, FDI-Friendly Policies on the Balance of Payments in a Developing Economy: A General Equilibrium Investigation

Arslan Razmi ()
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Arslan Razmi: University of Massachusetts Amherst

UMASS Amherst Economics Working Papers from University of Massachusetts Amherst, Department of Economics

Abstract: Many developing countries have adopted investor-friendly policies in recent years in order to attract export-oriented foreign direct investment (FDI). The effects of these policies on the external accounts have been largely ignored. This paper endogenizes FDI in°ows in a structuralist general equilibrium framework to contribute towards filling this gap. Our economy consists of: (i) a non-tradable goods sector and (ii) an export processing zone (EPZ) that hosts transnational corporations. The analysis finds that, contrary to widely-shared perceptions, the short-run effects of FDI-friendly policies on the balance of payments may frequently be negative due to the nature of both the investments and the policy measures. Moreover, balance of payments-related consequences of measures such as tax concessions and wage controls differ depending on: (i) which sector these are implemented in, (ii) the nature of international demand, and (iii) the extent of backward linkages between the EPZ and the domestic economy. JEL Categories: F21, F23, F41

Keywords: Foreign direct investment; balance of payments; export processing zones; structuralist macroeconomics; real exchange rates; income redistribution; terms of trade; transnational corpora- tions. (search for similar items in EconPapers)
Date: 2005-01, Revised 2006-09
New Economics Papers: this item is included in nep-ifn, nep-pke and nep-sea
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