Economic Reform, Skill Formation and Foreign Capital

Does trade liberalisation promote skill formation and positively influence the inflow of foreign capital in an economy? How do incentives offered to foreign capital affect skill formation and skilled-unskilled wage inequality? Is liberalisation of agricultural exports counterproductive to skill formation and foreign capital inflow in the economy? We try to capture these relationships between foreign capital and skill formation in a small open economy facing various exogenous shocks. Among other results, we show that import liberalisation increases skill formation and the inflow of foreign capital in the country. We explore the evolving state of the skilled-unskilled wage gap in a regime of greater skill formation. Copyright United Nations University 2006.