Capital Mobility with Convergence in Open Economies

Abstract

The major objective of the paper is to provide a theoretical description of convergence in neoclassical
models with various initial ratios of human to physical capital. To avoid immediate convergence,
adjustment costs (higher for human capital than for physical capital investment) are introduced. The
model is calibrated consistently with empirically-observed slow long-run convergence. Economies with
high initial ratios of human to physical capital are, however, predicted to grow quickly in the short
run. Moreover, substantial current-account deficits may occur due to high marginal products of
physical capital and resulting high levels of domestic physical capital investment. This analysis
seems relevant to Malaysian economies, which exhibit high ratios of human to physical capital,
current-account deficits, and relatively high average growth rates.