Essays on international lending and increasing returns to scale

Standard economic theory suggests that capital should flow from rich countries to poor countries. However, capital has predominantly flowed to rich countries. The three essays in this dissertation attempt to explain this phenomenon. The first two essays suggest theoretical explanations for why capital has not flowed to the poor countries. The third essay empirically tests the theoretical explanations.^ The first essay examines the effects of increasing returns to scale on international lending and borrowing with moral hazard. Introducing increasing returns in a two-country general equilibrium model yields possible multiple equilibria and helps explain the possibility of capital flows from a poor to a rich country. I find that a borrowing country may need to borrow sufficient amounts internationally to reach a minimum investment threshold in order to invest domestically.^ The second essay examines how a poor country may invest in sectors with low productivity because of sovereign risk, and how collateral differences across sectors may exacerbate the problem. I model sovereign borrowing with a two-sector economy: one sector with increasing returns to scale (IRS) and one sector with diminishing returns to scale (DRS). Countries with incomes below a threshold will only invest in the DRS sector, and countries with incomes above a threshold will invest mostly in the IRS sector. The results help explain the existence of a bimodal world income distribution.^ The third essay empirically tests the explanations for why capital has not flowed from the rich to the poor countries, with a focus on institutions and initial capital. I find that institutional variables are a very important factor, but in contrast to other studies, I show that institutions do not account for the Lucas Paradox. Evidence of increasing returns still exists, even when controlling for institutions and other variables. In addition, I find that the determinants of capital flows may depend on whether a country is rich or poor.^

Non -traded goods, product differentiation and integration of factor markets

This research sought to determine the implications of a non-traded differentiated commodity produced with increasing returns to scale, for the welfare of countries that allowed free international migration. We developed two- and three-country Ricardian models in which labor was the only factor of production. The countries traded freely in homogeneous goods produced with constant returns to scale. Each also had a non-traded differentiated good sector where production took place using increasing returns to scale technology. Then we allowed for free international migration between two of the countries and observed what happened to welfare in both countries as indicated by their per capita utilities in the new equilibrium relative to their pre-migration utilities. ^ Preferences of consumers were represented by a two-tier utility function [Dixit and Stiglitz 1977]. As migration took place it impacted utility in two ways. The expanding country enjoyed the positive effect of increased product diversity in the non-traded good sector. However, it also suffered adverse terms-of-trade as its production cost declined. The converse was true for the contracting country. To determine the net impact on welfare we derived indirect per capita utility functions of the countries algebraically and graphically. Then we juxtaposed the graphs of the utility functions to obtain possible general equilibria. These we used to observe the welfare outcomes. ^ We found that the most likely outcomes were either that both countries gained, or one country lost while the other gained. We were, however, able to generate cases where both countries lost as a result of allowing free inter-country migration. This was most likely to happen when the shares of income spent on each country's export good differed significantly. In the three country world when we allowed two of the countries to engage in preferential trading arrangements while imposing a prohibitive tariff on imports from the third country welfare of the partner countries declined. When inter-union migration was permitted welfare declined even further. This we showed was due to the presence of the non-traded good sector. ^

The commercial bark harvest of the African cherry (Prunus africana) on Mount Oku, Cameroon: Effects on traditional uses and population dynamics

Bark extracts of the African cherry (Prunus africana) are used to treat benign prostatic hyperplasia. This study examined the effects of commercial bark harvest on population dynamics in the Kilum-Ijim Forest Preserve on Mount Oku, Cameroon and on traditional uses. P. africana is valued for its timber and as fuel although its greatest value is as a traditional medicine for human and animal ailments. Harvest has depleted the resource and has eroded traditional forest protection practices. I constructed matrix models to examine the effects of bark harvest on population structure and on population dynamics in harvested and unharvested populations. Harvesting simulations examined the effect on the population growth rate (λ) with differing levels of mortality of harvest-sized and large trees and differing harvest frequencies. Size class frequencies for the entire forest decreased in a reverse j-shaped curve, indicating adequate recruitment in the absence of harvest. Individual plots showed differences from the overall forest data, suggesting effects of natural and man-made perturbations, particularly due to bark harvest. One plot (harvested in the 1980s) showed a temporal difference in λ and fluctuated around one, due to alternating high and low fruiting years; other unharvested plots showed smaller temporal differences. Harvested plots (harvested illegally in 1997) had values of λ less than one and showed small temporal differences. The control plot also showed λ less than one, due to poor recruitment in the closed canopy forest. The value of λ for the combined data was 0.9931 suggesting a slightly declining population. The elasticity matrix for the combined data indicated the population growth rate was most sensitive to the survival of the large reproductive trees (42.5% of the elasticity). In perturbation analyses, reducing the survival of the large trees caused the largest reductions in λ. Simulations involving harvesting frequency indicated λ returns to pre-harvest conditions if trees are re-harvested after 10–15 years, but only if the large trees are left unharvested. Management scenarios suggest harvest can be sustainable if seedlings and small saplings are planted in the forest and actively managed, although large-scale plantations may be the only feasible option to meet market demand. ^