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Abstract

This paper examines the effectiveness of globalization in the case of Fiji. The paper employs simulation methodology and the dynamic multiplier analysis, using a two-sector model, to evaluate the effects of capital flows on economic growth. First, the short run (impact multiplier) and the long run multipliers are calculated for seven endogenous variables with respect to nine exogenous variables. Second, the counterfactual simulation analysis tests how the interactions under alternative assumptions between foreign direct investment (FDI) and aid flows determine the effectiveness of globalization. The results show that aid increases government investment while FDI increases private investment. Also FDI has a larger impact on savings and imports; however exports do not change with either of the exogenous variables. Overall, under the alternative assumptions, as military coups caused political and economic instability economic growth does not differ from ‘no policy change’ from an increase in FDI or foreign aid flow.

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