Capital flight, North-South lending, and stages of economic development

We present a two-country OLG economy in which international capital mobilit y exists in the presence of moral hazard in financial contracts. The differ ence in the extent of asymmetric information is a source of capital movemen t and capital flows from the South to the North. Even though there exists a unique steady state under autarky, multiple locally stable steady states m ay emerge in a world economy with an integrated capital market. However, th e integration may drive the South down to further impoverishment. Tl-le Sou th's government therefore should take into account seriously the timing of capital market liberalization as a conduit of economic development.