Why are poor countries poor?
AbstractWe attempt to explain why standard explanations of the poverty of nations are unsatisfactory. We first argue that human capital is low in poor countries because its production has increasing returns with respect to life expectancy. We then show that the reason why capital does not flow to poor countries (the Lucas paradox) can readily be explained once market prices rather than PPP prices are used to assess the return to physical capital: the return to capital in poor countries is not higher than in the rich world in spite of its relative scarcity. We finally argue that PPP calculations bias downwards the measured TFP of poor countries, which may in part explain their lower productivity. The message of hope is that education can shoot up as life expectancy increases. A higher level of human capital would appreciate the real exchange rate through a Balassa-Samuelson effect, thus raising the profitability physical capital. This in turn would encourage foreign capital to flow to developing countries
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Date of creation: 11 Aug 2004
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Human capital; capital flows; Lucas Paradox;
Find related papers by JEL classification:
- F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
- J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
- O47 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-10-30 (All new papers)
- NEP-DEV-2004-10-30 (Development)
- NEP-IFN-2004-10-30 (International Finance)
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