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CAPITAL INFLOW UNDER VOLUNTARY EXPORT RESTRAINT
Author(s) -
Chakraborty Brati Sankar
Publication year - 2008
Publication title -
metroeconomica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.256
H-Index - 29
eISSN - 1467-999X
pISSN - 0026-1386
DOI - 10.1111/j.1467-999x.2008.00338.x
Subject(s) - economics , capital outflow , welfare , inflow , capital (architecture) , monetary economics , capital intensity , commodity , international economics , capital formation , market economy , financial capital , human capital , physics , archaeology , mechanics , history
This paper investigates the welfare consequence of exogenous capital inflow for the host country when the source country implements ‘voluntary export restraint’. In an imperfectly competitive market with an increasing returns to scale (IRS) sector, we show the possibility of welfare immiserization. Two channels are identified leading to immiserization. First, and this is direct, resource reallocation following capital inflow can squeeze the underproduced sector and reduce welfare. Second, contraction of the IRS sector can raise the return to capital, even when the price of the capital‐intensive importable falls unambiguously. Thus, even with an improvement in commodity terms of trade, the factor terms of trade can worsen and reduce welfare.