modal welfare gains of those who gain are roughly<sup>18,591baht or25,655underthe no-creditandcredit</sup> distributions which correspond to roughly 24<sup>percentand34percentof 1996average householdyearly</sup> income, equivalent to $1,030 at the 1997 exchange rate.<sup>Themean losses,forthoseworse off are115,861</sup> baht or 117,051 using the no-credit and credit distributions<sup>respectively,whichamountsto 1.06times or</sup> 1.08 times the average household yearly income for the<sup>sample of entrepreneurs,orroughly $4,650 using</sup> again the 1997 exchange rate.

# 10 Extensions: International Capital Inflows and<sup>Alternative</sup> Credit Regimes

In this section, we explore two important extensions to<sup>themodel.Thesemaybeviewedasrobustness</sup> checks to the results presented in the previous sections.<sup>The first concernsthe liberalizationof the capital</sup> account that Thailand experienced, especially after<sup>1988.The secondrelaxes theassumption of restricted</sup> credit to allow for some external financing.<sup>Wenowtakeeachoneinturn.</sup> Figure 11 in page 48 displays the capital inflows<sup>asa fractionof GDP.Thedatacomefrom theBank</sup> of Thailand as reported in Alba, Hernandez and<sup>Klingbiel(1999).From1976to1986,privatecapital</sup> inflows to Thailand remained relatively low at an<sup>average of1.05%of GDP.From1986to1988,however,</sup> they increased rapidly to 10% of GDP, remaining at that<sup>averageleveluntil1996.</sup> This enhanced capital availability was funnelled through<sup>thefinancialsectorandthusitismodelled</sup> here as additional capital for those households that<sup>haveaccessto thefinancialmarket(i.e.residingin</sup> the credit sector). We run this extended (open)<sup>versionofthemodelattheestimatedandcalibrated</sup> parameters and compare it to the previous closed credit<sup>economymodelatthesameestimatedand</sup> calibrated parameter values from the two datasets<sup>39 .Althoughnot shown,capitalinflowscontributeto</sup> a larger number of entrepreneurs, and larger firm<sup>size,inparticularinthe late80's andearly90's.Since</sup> the marginal product of labor increases with capital<sup>utilization,morelaborisdemandedandthus the</sup> fraction of subsisters is depleted earlier. Thus labor<sup>sharerisesandinequalitydecreases,bothrelativeto</sup> the actual path and relative to the earlier simulation.<sup>The interestratetends tobelowerwithcapital</sup> inflows. Nevertheless, the welfare changes are<sup>small,indeed, almostnegligible.</sup> Because the surge in capital inflows coincides with the<sup>phaseof highgrowth of per capitaGDP,it has</sup> often been portrayed as an important factor contributing<sup>tothathigh growth.In orderto disentangle</sup> the extent to which the phase of high growth<sup>wasduetoincreasedparticipationinthe creditmarket</sup> versus additional capital availability due to capital account<sup>liberalization,we simulatethe economyat the</sup> estimated and calibrated parameter values allowing<sup>forinternationalcapitalinflowsbut usinga linearized</sup> credit participation from 6% to 26%, that is, a<sup>one</sup> percent<sup>increaseperyearfor eachof the20 years.As</sup> displayed in Figure 12, page 48, this version of the<sup>modelfailsto matchthe upturninGDPgrowthas</sup> compared to the benchmark credit economy. Thus,<sup>itseemsfromthe modelthatcapitalinflowsperse</sup> were not the cause of the high growth that Thailand experienced<sup>inthe late80's.</sup> The assumption of restricted credit may artificially<sup>deliverquantitativelylargewelfaregainsfrom</sup> liberalization if those assumed to have no access<sup>wereinfactabletoreceivesomecredit,perhapsfrom</sup>

> **391n addition, we re-calibrated** the **cost** of **living v,** subsistence level **growth rate 7gr** and **the** bequest **motive parameter** _w_ **for this open** economy **version** and found **even fewer**<sup>**differencescomparedto**the</sup><sup>**closedeconomymodel.**In</sup><sup>**particular,**</sup> the **calibrated** bequest **motive** parameter **_w_** _is_ lower<sup>**for**</sup> both<sup>datasets</sup><sup>**in**the openeconomy</sup><sup>**version,sothat**the depletion</sup><sup>**of**</sup> **subsisters** happens at **a** slower rate.

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