Why doesn't capital flow from rich to poor countries? An empirical investigation

We examine the empirical role of different explanations for the lack of capital flows from rich to poor countries--the "Lucas Paradox." The theoretical explanations include cross-country differences in fundamentals affecting productivity, and capital market imperfections. We show that duri...

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Veröffentlicht in:The review of economics and statistics 2008-05, Vol.90 (2), p.347-368
Hauptverfasser: Alfaro, L, Kalemli-Ozcan, S, Volosovych, V
Format: Artikel
Sprache:eng
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Zusammenfassung:We examine the empirical role of different explanations for the lack of capital flows from rich to poor countries--the "Lucas Paradox." The theoretical explanations include cross-country differences in fundamentals affecting productivity, and capital market imperfections. We show that during 1970-2000, low institutional quality is the leading explanation. Improving Peru's institutional quality to Australia's level implies a quadrupling of foreign investment. Recent studies emphasize the role of institutions for achieving higher levels of income but remain silent on the specific mechanisms. Our results indicate that foreign investment might be a channel through which institutions affect long-run development.
ISSN:0034-6535
1530-9142
DOI:10.1162/rest.90.2.347