Growth in the Shadow of Expropriation

50 Pages Posted: 4 Aug 2009 Last revised: 9 Jul 2010

See all articles by Mark Aguiar

Mark Aguiar

Princeton University

Manuel Amador

affiliation not provided to SSRN

Date Written: July 2009

Abstract

In this paper, we propose a tractable variant of the open economy neoclassical growth model that emphasizes political economy and contracting frictions. The political economy frictions involve disagreement and political turnover, while the contracting friction is a lack of commitment regarding foreign debt and expropriation. We show that the political economy frictions induce growth dynamics in a limited-commitment environment that would otherwise move immediately to the steady state. In particular, greater political disagreement corresponds to a high tax rate on investment, which declines slowly over time, generating slow convergence to the steady state. While in the standard neoclassical growth model capital's share in production plays an important role in determining the speed of convergence, this parameter is replaced by political disagreement in our open economy reformulation. Moreover, while political frictions shorten the horizon of the government, the government may still pursue a path of tax rates in which the first best investment is achieved in the long run, although the transition may be slow. The model rationalizes why openness has different implications for growth depending on the political environment, why institutions such as respect for property rights evolve over time, why governments in open countries that grow rapidly tend to accumulate net foreign assets rather than liabilities, and why foreign aid may not affect growth.

Suggested Citation

Aguiar, Mark and Amador, Manuel, Growth in the Shadow of Expropriation (July 2009). NBER Working Paper No. w15194, Available at SSRN: https://ssrn.com/abstract=1442659

Mark Aguiar (Contact Author)

Princeton University ( email )

Princeton, NJ 08544-1021
United States

Manuel Amador

affiliation not provided to SSRN

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