We consider a simple model of growth in an economy with public capital. The government finances public capital with tax revenue or debt. This results in areas of increasing returns to scale and different (sets of) feasible steady states that are determined by initial conditions. With a balanced budget, it may not be feasible to move from low to high income levels. In this case, external debt may be the only way out of such a development trap, provided the world interest rate is low enough.
|Journal||European journal of political economy = Europäische Zeitschrift für politische Ökonomie|
|Publication status||Published - 1 Jan 1998|
- Development traps
- External debt
- Public capital