The role of export subsidies in balance-of-payment crises

This paper investigates the effects of export subsidies when capital goods are imported for use in production of export goods. Export subsidies increase the demand for foreign capital at the expense of domestic consumption. The increase in the capital stock raises the real wage rate while leaving the real rental rate unchanged. However, if the speed of capital accumulation exceeds the savings rate, deterioration of the trade balance may occur. We show thereby that export subsidies can be linked to balance-of-payment crises.