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| Volume 5, No. 1,
April 2006 |
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Transfers, Trade Taxes, and
Endogenous Capital Flows: With Evidence from Sub-Saharan Africa |
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Subhayu Bandyopadhyay |
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Department of Economics,
West Virginia University, U.S.A. |
| Jonathan
Munemo |
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World Bank, U.S.A. |
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| Abstract |
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Sub-Saharan Africa (SSA)
is highly dependent on imported capital goods that are used in the
import competing industrialized sector. The exporting sector focuses
on primary products where land and labor are predominantly used. We
build a two-good general equilibrium model, where the import
competing sector uses imported capital input. Transfers induce
changes in commodity terms of trade, which in turn affects capital
inflows and the price of imported capital. The welfare effect of
transfers is considered in the context of induced changes in these
variables. In the context of an exogenous export tax, we find that
endogenous capital flows aggravate the transfer problem that exists
under trade taxation. When trade liberalization is tied to
transfers, we find that the tying of aid may worsen or alleviate the
transfer problem, depending on how the existing export tax compares
with the optimum. We complement our theoretical analysis with an
empirical analysis of the transfer problem in the context of
endogenous capital inflows. This is done by estimating a regression
model with fixed effects for a panel of 14 countries in SSA. Our
findings substantiate the concerns raised by the theoretical
analysis. |
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Key words:
transfers;
trade taxes; endogenous capital flows; welfare |
| JEL
classification:
F1; O1 |
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