DP3075 | The Political Economy of Education and Development in an Open Economy

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If the price effect of opening up a developing economy may be expected to act as a disincentive for investment in human capital, the opposite is likely to be true of the income effect, especially in the presence of credit market imperfections among the poor. It is shown in this Paper that this may not be the case anymore in a society initially dominated by an oligarchic capitalist elite that is afraid of losing its political control in favour of an educated middle class. Although it may sometimes be in its interest to democratize by subsidizing education when the economy is closed, incentives to do so disappear when the economy is open to trade or factor flows.