Direct foreign investment and welfare in the transforming economies: The case of Central Asia

This paper studies the welfare effects of foreign investment into an economy with a trade regime of export taxes and/or import subsidies. This regime is characteristic of the Central Asian economies but has received no consideration in previous literature. We show that in many circumstances, foreign investment into an economy with a Central-Asian-type trade regime reduces welfare. In particular, we find that foreign investment is most likely to immiserize when it is directed toward nondistorted traded sectors or free trade zones. (C) 1997 Academic Press.