ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846
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Level of Activity in an Economy with Free Capital Mobility

The purpose of this paper is to argue that the 'opening up' of an underdeveloped economy to free capital flows, instead of boosting its rate of growth as neo-liberals claim, would have the precisely opposite effect of unleashing ceteris paribus a tendency towards stagnation and greater unemployment. The reason for this is simple. The neo-liberal claim is based on the assumption that such 'opening up' would cause a substantial increase in the rate of productive investment in the economy. This claim, even if much direct foreign investment (DFI) were to flow in to the economy, is not necessarily valid, since such DFI inflow may well be of the sort that replaces domestic investment, and hence causes unemployment and a reduction in the level of activity ('de-industrialisation').

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