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The B.E. Journal of Macroeconomics

Editor-in-Chief: Cavalcanti, Tiago / Mertens, Karel

Ed. by Abraham, Arpad / Carceles-Poveda , Eva / Debortoli, Davide / Kambourov, Gueorgui / Lambertini, Luisa / Pavoni, Nicola / Ruhl, Kim / Nimark, Kristoffer / Wang, Pengfei


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1935-1690
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Education, Growth, and Redistribution in the Presence of Capital Flight

Debajyoti Chakrabarty1 / Areendam Chanda2 / Chetan Ghate3

1The University of Sydney, Australia,

2Louisiana State University,

3Indian Statistical Institute - Delhi Center,

Citation Information: Topics in Macroeconomics. Volume 6, Issue 2, ISSN (Online) 1534-5998, DOI: 10.2202/1534-5998.1442, November 2006

Publication History

Published Online:
2006-11-01

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.

Keywords: capital flight; distributional conflict; economic growth; human capital; income distribution; international linkages to development; long term capital movements; optimal taxation

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