Foreign Capital and Urban Congestion in Emerging Markets

• Author: Ravi Batra,Hamid Beladi
• Published date: 01 November 2013
• DOI: http://doi.org/10.1111/rode.12058
• Date: 01 November 2013

Foreign Capital and Urban Congestion in

Emerging Markets

Ravi Batra and Hamid Beladi*

Abstract

Traditional literature emphasizes the role of foreign capital, especially foreign direct investment (FDI) in

explaining the high growth rates that many emerging economies have enjoyed during 1990s and 2000s. The

present paper accepts this conventional wisdom but argues that the FDI has also created problems of urban

sprawl and congestion that would not be so intense if economic development had primarily come from

domestic sources. This is because the FDI is typically concentrated in urban areas that abound in manufac-

turing and it neglects the rural areas where agriculture predominates. The paper suggests that a small tax

on foreign capital tends to mitigate the side effects of foreign investment.

1. Introduction

Many emerging markets such as India, Ireland, Brazil, and China have made great

economic strides during 1990s and 2000s. Their growth rates have been impressive,

some routinely exceeding 8% per year. Their living standards have also risen signifi-

cantly, and foreign capital seems to have played a substantial role in their develop-

ment. In fact, a vast literature has developed to show that foreign capital, especially

foreign direct investment (FDI), has been a major force in the rapid growth of most

emerging economies. Foreign capital not only fills the critical savings gap of recipient

countries, it also provides new technology that makes labor very productive. Fre-

quently, the FDI providers help with product marketing so that goods can be

imported into developed countries. This way foreign investment brings a variety of

benefits to host nations and raises their living standards.

This is what the traditional literature emphasizes, especially the spillover effects of

FDI,1yet the emerging markets have experienced problems that may be typically

associated with capital inflows and the FDI. Urban congestion or sprawl is one such

problem, which perhaps would not have been so intense if growth had come primarily

from the use of domestic resources. Urban population growth rates have been far

greater than the growth of general population, especially in India, Singapore, and

Thailand among others. Take, for instance, the case of India, which has been well

documented by Sivaramakrishnan and Singh (2001). The authors show that over a 100

years from 1901 to 2001, India’s urban population jumped from being 11% of the

total population to as much as 28%. By 2025, this percentage is expected to rise to

42%.

Furthermore, much of the urban population growth occurred in five major cities of

Bombay, Calcutta, New Delhi, Madras, and Bangalore. These are also the cities that

have received the bulk of FDI, suggesting that the growth in FDI parallels the growth

* Beladi: University of Texas at San Antonio, San Antonio, TX 78249, USA. E-mail: hamid.beladi@

utsa.edu. Batra: Southern Methodist University, Dallas, TX 75275-0100, USA. We are grateful to anony-

mous referees for constructive comments on an earlier version of this paper. The usual disclaimer applies.

Review of Development Economics, 17(4), 676–684, 2013

DOI:10.1111/rode.12058

© 2013 John Wiley & Sons Ltd