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AEA PA PERS AND PROCEEDINGS MAY1990 not of interest to Europeans only. There is man capital surely have a much larger poten much unsystematic evidence of heavy private tial. So too, I think, do policies in which aid taxation of capital inflows in Indonesia, the of any form is tied to the recipient's open- Phillipines, in the Iran of the Shah, and ness to foreign investment on competitive other poor economies that are otherwise at- terms. tractive to foreign investors. Restrictions on capital flows imposed by the borrowing country are often explained as arising from REFERENCES mistrust of foreigners or a reluctance to let development proceed"too fast, "but I think Davis, Lance E. and Huttenback, Robert A, such explanations warrant a Smithian skep Businessmen, the Raj, and the Pattern of tis Government Expenditures: The British mpire, 1860 to 1912, " in David W. Galenson, ed, Markets in History, Cam bridge: Cambridge University Press, 1989 Why does it matter which combination, Denison, Edward F, The Sources of economic if any, of the four hypotheses I have ad Growth in the United States. New York: vanced is adequate to account for the ab Committee for Economic Development, sence of income equalizing international ca 1962. ital flows? The central idea of virtually all Dobb, Maurice, Political Economy and Capi- postwar development policies is to stimulate talism, Westport: Greenwood, 1945 transfers of capital goods from rich to poor Krue" capita income Differences Among Anne O"Factor Endowments and countries. Insofar as either of the human capital-based hypotheses reviewed in Sec Countries, Economic Journal, September tions I and II of this paper is accurate, such 1968,78,641-59 transfers will be fully offset by reductions in Lucas, Robert E,, Jr, On the Mechanics of private foreign investment in the poor coun- Economic det lopment, " Journal of Mon try, by increases in that country's invest etary Economics, January 1988, 22, 3-32 ments abroad or both. Insofar as returns on Romer, Paul M-, " Increasing Returns and capital are not equalized, but where return Long-Run Growth, Journal of Political differentials are maintained so as to secure Economy, October 1986, 94, 1002-37 monopoly rents, capital transfers to poor Smith, Adam, The Wealth of Nations, Chicago ountries will also be fully offset by reduc- University of Chicago Press, 1976 tions in private investments. Giving goods to Stokey, Nancy Lo, "Learning by Doing and a monopolist does not reduce his interest in the Introduction of New Goods, Journal exploiting potential rents of political Economy, August 1988, 96 Only insofar as political risk is an impor 701-17 tant factor in limiting capital flows can we Summers, Robert and Heston, Alan, "A New Set expect transfers of capital to speed the inter- of International Comparisons of Real national equalization of factor prices. In a Product and Price Levels: Estimates for world of largely immobile labor, policies fo- 130 Countries, 1950-1985, Review of In- cused on affecting the accumulation of hu come and Wealth, March 1988. 34.1-2
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