International Factor Movements and the Ramaswami Argument

In a succinct but classic article appearing in Economica in 1968, Ramaswami put forth an argument supporting the superiority of a policy that attracts foreign factors over a policy that allows a relatively abundant factor to emigrate. In each case the active home country is assumed to levy taxes on factor flows so as to capture for itself the discrepancy in return to the same factor at home and abroad. The asymmetry reflected by this policy ranking rests on a basic propeity of production functions-the convexity of technology-plus the ability of the active home country to hire (or rent out) factors at wages or rentals prevailing in the foreign country.' Briefly put, the Ramaswami argument proceeds as follows. Suppose the active home country is capital-abundant and has levied on optimal tax on earnings of its own capital operating abroad. Now consider repatriating this capital, and allowing, for the first time, some inflow of foreign labour. In particular, suppose the home country allows a level of immigration identical to the labour force previously employed with the home capital that is being repatriated. Such a transfer of (home) capital and (foreign) labour out of the foreign country leaves factor proportions abroad undisturbed, and thus does not alter the wage that must be paid to attract the requisite bundle of foreign workers. Although the home country thus avoids any increase in factor costs in foreign markets, it can increase output since the capital/labour ratiooriginally employed at home at high home wage rates is greater than the ratio in the freshly acquired bundle from abroad. By adopting a uniform capital/labour ratio over all factors now employed at home, output, and thus real income, rises. There may be even further gains to be had by allowing yet a different (optimal) level of immigration in the home country, which has now banned capital exports.2 Essential to the Ramaswami argument is the ability of the home country to extract a bundle of factors previously employed abroad without disturbing factor prices in that country. Indeed, Jones, Coelho and Easton (1983) have suggested that, in the context of the Ramaswami discussion, the original argument could be pursued to suggest that the home country gains not only from repatriating its own capital but from actually encouraging foreign capital to be employed at home. Such a capital flow is admittedly uphill-the home country would have to pay out more in rentals than such capital can earn at home. Despite this fact, such an import of capital and labour, in the same proportions found abroad, does not alter foreign factor prices but does, via the same Ramaswami-type argument on the convexity of the technology, result in gains at home. Although Ramaswami's own discussion starts with a repatriation of home capital previously invested abroad, his argument can be applied directly to the foreign autarky factor endowment bundle. If technology exhibits constant returns to scale, and if all (both) factors are indeed internationally

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• International Factor Movement and the National Advantage

  L Roy Webb, Lawrence Webb•Economica•1970

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• [International Factor Movement and the National Advantage]

  V K Ramaswami•Economica•1970

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