Intertemporal Trade between Developed and Developing Nations: A Model of Host-Donor Tensions

Intertemporal Trade between Developed and Developing Nations: A Model of Host-Donor Tensions

Using a two-country overlapping generations model, we analyze some of the tensions between developed and developing nations regarding international capital movements. The nature of the model is such that optimizing agents in the South have a high rate of time preference. Otherwise, the North and the South are alike in all resepects. The differential rate of time preference means that the South is likely to have a relatively low capital/labor ratio, wage rate, and level of per capita income but a relatively high interest rate in autarkic equilibrium. The introduction of international capital flows (intertemporal trade) will be welfare reducing for the current generation in the South even though it may increase the next generation`s (and steady state) utility. We discuss the international conflicts which arise with international capital movements and the intergenerational conflicts which arise within each nation.