The impact of surges in net private capital inflows on manufacturing, investment, and unemployment

We use local projection methods to examine the dynamic response of surges in net private capital inflows on the output and employment shares of manufacturing, the investment output ratio, and the unemployment rate. High income countries are studied separately from emerging economies, both from Asia and Latin America. Our sample covers the years from 1970 to 2010. We find that surges in high income countries do not magnify the trend toward deindustrialization. However, the persistent decline in the investment to GDP ratio and the rise in the overall unemployment rate suggest that surges may negatively affect longer run growth prospects and employment opportunities in these countries. In middle income Asian countries, surges tend to induce deindustrialization in both output and employment in the medium run, but they do not lower the investment to GDP ratio. In middle income Latin America, surges speed up deindustrialization, lower investment and raise economy-wide unemployment.