Education, Growth, and Redistribution in the Presence of Capital Flight

Louisiana State University Economics Working Paper No. 2006-10

39 Pages Posted: 8 May 2006

See all articles by Debajyoti Chakrabarty

Debajyoti Chakrabarty

University of Sydney

Areendam Chanda

Louisiana State University, Baton Rouge - Department of Economics

Chetan Ghate

Indian Statistical Institute - Planning Unit; German Institute for Economic Research (DIW Berlin)

Date Written: April 2006

Abstract

The conventional wisdom in the literature on capital controls and growth argues that capital controls increase the ability of a government to tax capitalists which proves detrimental for growth. To address this issue, we construct an OLG model to study the effect of capital controls on human capital investments and the incidence of redistributive taxation in a growing economy. We argue to the contrary: i.e., 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 can induce balanced growth, and the wisdom does not apply. When the model is augmented with a subsistence sector, we show that if workers are sufficiently poor, then workers do not invest in human capital. Hence, a modern sector does not exist. Higher capital controls however makes 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 which show that, while financial liberalizations are associated with significant increases in growth, the effect is larger for countries with high education levels. Our results are also consistent with empirical evidence that argues that liberalizing the capital account positively affects growth only after a country has achieved a certain degree of economic development.

Keywords: Capital Flight, Economic Growth, Human Capital, Income Distribution, International

JEL Classification: F21, D33, E62, O19, O40

Suggested Citation

Chakrabarty, Debajyoti and Chanda, Areendam and Ghate, Chetan, Education, Growth, and Redistribution in the Presence of Capital Flight (April 2006). Louisiana State University Economics Working Paper No. 2006-10, Available at SSRN: https://ssrn.com/abstract=899685 or http://dx.doi.org/10.2139/ssrn.899685

Debajyoti Chakrabarty

University of Sydney ( email )

University of Sydney
Sydney, NSW 2006
Australia

Areendam Chanda (Contact Author)

Louisiana State University, Baton Rouge - Department of Economics ( email )

Department of economics
Baton Rouge, LA 70803-6308
United States
225-578-3791 (Phone)

Chetan Ghate

Indian Statistical Institute - Planning Unit ( email )

7 S. J. S. Sansanwal Marg
New Delhi, 110016
India
91 11 51493938 (Phone)
91 11 2685 6779 (Fax)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

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