We 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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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
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Acemoglu, Daron & Zilibotti, Fabrizio, 1998.
"Productivity Differences,"
Seminar Papers
660, Stockholm University, Institute for International Economic Studies.
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Coe, David T & Helpman, Elhanan & Hoffmaister, Alexander W, 1997.
"North-South R&D Spillovers,"
Economic Journal,
Royal Economic Society, vol. 107(440), pages 134-49, January.
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David T. Coe & Elhanan Helpman & Alexander Hoffmaister, 1995.
"North-South R&D Spillovers,"
NBER Working Papers
5048, National Bureau of Economic Research, Inc.
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