Growth in the Shadow of Expropriation / Mark Aguiar, Manuel Amador.

Format:

Book

Author/Creator:

Aguiar, Mark.

Contributor:

National Bureau of Economic Research.

Amador, Manuel.

Series:

Working Paper Series (National Bureau of Economic Research) no. w15194.

NBER working paper series no. w15194

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2009.

Summary:

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.

Notes:

Print version record

July 2009.