Foreign Capital Inflow and Regional Immiserization

Bharat Hazari and Pasquale Sgro ()

Journal of Economic Integration, 1998, vol. 13, 485-498

Abstract:

In recent years a number of papers have examined the impact of inflow of foreign capital on welfare in a trade theoretic model. Two fundamental ques - tions have been raised in this literature. First, what is the welfare impact of foreign capital inflow under a laissez faire regime? Second, what is the impact of tariff induced capital inflow on welfare? In this paper we depart from the Heckscher-Ohlin framework where there is only one representative agent whose welfare is considered. We exploit a trade theoretic framework to analyse the impact on an inflow of foreign capital on regional welfare, in particular, urban and rural incomes. The analysis is undertaken in a four goods, two region model where each region produces and consumes its own non-traded good. Foreign capital is only used in the urban region and its inflow is treated initially as exogenous and later endogenised via a movement in the terms-of-trade. An exogenous inflow of foreign capital necessarily raises aggregate urban income irrespective of capi - tal intensity conditions. The rural region is ‘immiserized’ by the inflow of for - eign capital provided that the rural traded good is more capital intensive than the rural non-traded good. In this framework rural employment always falls and urban employment always rises. In the case where foreign capital inflow is induced by a change in the terms-of-trade, immiserization may occur in both regions depending on the capital intensities in all sectors. This paper highlights the locational implication of the inflow of foreign capital.

Keywords: Foreign; Capital; Inflow (search for similar items in EconPapers)
JEL-codes: F20 O10 R10 (search for similar items in EconPapers)
Date: 1998
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Persistent link: https://EconPapers.repec.org/RePEc:ris:integr:0083

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