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CAPITAL FLOWS AND EXPORT EXTERNALITIES: AN EAST ASIAN CURE FOR THE DUTCH DISEASE? *
Author(s) -
Petri Peter A.
Publication year - 1989
Publication title -
asian economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.345
H-Index - 28
eISSN - 1467-8381
pISSN - 1351-3958
DOI - 10.1111/j.1467-8381.1989.tb00141.x
Subject(s) - economics , subsidy , externality , dutch disease , monetary economics , welfare , open economy , consumption (sociology) , investment (military) , incentive , international economics , profit (economics) , capital accumulation , foreign direct investment , interest rate , exchange rate , macroeconomics , market economy , microeconomics , social science , sociology , politics , law , political science
Summary The analysis so far suggests several conclusions regarding policy under externalities in tradables production. It shows that conventional profit‐maximizing solutions lead to too much investment, too much “up front” consumption, high period 1 real exchange rates, and underproduction of tradables. In this setting, it is possible that an improvement in an economy's access to foreign capital will lead to welfare losses. These distortions are most efficiently corrected by a tradables output subsidy, equal to the externality. This subsidy should be increased if the economy's access to foreign capital markets improves. In the absence of such subsidies, however, incentives to reduce investment and postpone consumption may be appropriate second‐best policies. These policies, in effect, drive a wedge between rates of return on investment and foreign interest rates. Therefore the optimal policy will also require controls on foreign capital seeking to take advantage of higher interest rates at home than abroad.