Financial globalization and economic growth

Abstract

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.