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Foreign Capital and Economic Growth


Eswar S. Prasad


Cornell University - Dyson School of Applied Economics and Management; Cornell University - Department of Economics; Brookings Institution; NBER; Institute for the Study of Labor (IZA)

Raghuram G. Rajan


University of Chicago - Booth School of Business; International Monetary Fund (IMF); National Bureau of Economic Research (NBER)

Arvind Subramanian


International Monetary Fund (IMF); Center for Global Development

November 2007

NBER Working Paper No. w13619

Abstract:     
We document the recent phenomenon of "uphill" flows of capital from nonindustrial to industrial countries and analyze whether this pattern of capital flows has hurt growth in nonindustrial economies that export capital. Surprisingly, we find that there is a positive correlation between current account balances and growth among nonindustrial countries, implying that a reduced reliance on foreign capital is associated with higher growth. This result is weaker when we use panel data rather than cross-sectional averages over long periods of time, but in no case do we find any evidence that an increase in foreign capital inflows directly boosts growth. What explains these results, which are contrary to the predictions of conventional theoretical models? We provide some evidence that even successful developing countries have limited absorptive capacity for foreign resources, either because their financial markets are underdeveloped, or because their economies are prone to overvaluation caused by rapid capital inflows.

Number of Pages in PDF File: 64

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Date posted: November 29, 2007  

Suggested Citation

Prasad, Eswar S. and Rajan, Raghuram G. and Subramanian, Arvind, Foreign Capital and Economic Growth (November 2007). NBER Working Paper No. w13619. Available at SSRN: http://ssrn.com/abstract=1033745

Contact Information

Eswar S. Prasad
Cornell University - Dyson School of Applied Economics and Management ( email )
440 Warren Hall
Ithaca, NY 14853
United States
HOME PAGE: http://prasad.aem.cornell.edu
Cornell University - Department of Economics ( email )
414 Uris Hall
Ithaca, NY 14853-7601
United States
Brookings Institution ( email )
1775 Massachusetts Ave, NW
Washington, DC 20036
United States
NBER ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Institute for the Study of Labor (IZA)
P.O. Box 7240
Bonn, D-53072
Germany
Raghuram G. Rajan (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-4437 (Phone)
773-702-0458 (Fax)
International Monetary Fund (IMF) ( email )
700 19th Street NW
Washington, DC 20431
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
773-702-9299 (Phone)
773-702-0458 (Fax)
Arvind Subramanian
International Monetary Fund (IMF) ( email )
700 19th Street NW
Washington, DC 20431
United States
Center for Global Development
2055 L St. NW
5th floor
Washington, DC 20036
United States
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