Real Exchange Rate and Human Capital in the Empirics of Economic Growth

This paper discusses the relative importance of transitional dynamics and steady state issues in growth. A new perspective is proposed about this debate, marked by different views. We argue that it is also important to consider the dynamics of economies, given the presence of low speed of convergence. We use the real exchange rate and take into account a model where all variables like GDP have the same dynamics. Moreover, we explicitly derive a role for human capital in growth regressions.

Financial globalization, convergence and growth

We provide evidence that the composition of foreign capital, measured by the ratio foreign direct investment over total liabilities, a.ects growth directly and through the speed of convergence. Developing countries benefit relatively more as their initial GDP is smaller. The dataset comprises the period 1970-2004 and 96 countries, and the results are robust to di.erent measures of the composition of foreign capital, restricted time period, developing countries, and alternative explanations of convergence and growth. These results are consistent with the neoclassical growth model with credit constraints presented in this paper, in which the composition of foreign capital a.ects the transition dynamics through a positive e.ect on the speed of convergence and steady state GDP.composition of foreign capital; speed of convergence; growth.

Capital movements and the political economy of trade policy

We develop a political economy model of trade policy using a sector specific factor model with international capital mobility, looking for the relationship between protection and the composition of foreign capital. As foreign direct investment is remunerated at the marginal productivity of capital, an increase of the tariff raises its remuneration, increasing also the transfer of resources abroad. This is an additional cost of the tariff in terms of welfare. As external debt is remunerated at a given international interest rate, the additional cost of protection in terms of welfare does not appear. Then the equilibrium tariff with external debt is higher than with foreign direct investment. We present evidence for a panel of developing countries observed between 1970 and 1998 giving support to the main implication of the model. We find a significant effect of the composition of foreign capital on trade policy, implying that countries which have relatively more foreign direct investment than external debt also have less protection

Financial globalization and economic growth

Capital mobility leads to a speed of convergence smaller in an open economy than in a closed economy. This is related to the presence of two capitals, produced with specific technologies, and where one of the capitals is nontradable, like infrastructures or human capital. Suppose, for example, that the economy is relatively less abundant in human capital, leading to a decrease of the remuneration of this capital during the transition. In a closed economy, the remuneration of physical capital will be increasing during the transition. In the open economy, the alternative investment yields the international interest rate, corresponding to the steady state net remuneration of physical capital in the closed economy. The nonarbitrage condition shows a larger difference in the remuneration of the two capitals in the closed economy. It leads to a higher accumulation of human capital and thus to a faster speed of convergence in the closed economy. This result stands in sharp contrast with that of the one-sector neoclassical growth model, where the speed of convergence is smaller in the closed economy