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Why doesn’t Capital Flow from Rich to Poor Countries? An Empirical Investigation

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Author Info
Sebnem Kalemli-Ozcan () (Department of Economics, University of Houston)
Laura Alfaro (Department of Economics, Harvard Business School)
Vadym Volosovych (Department of Economics, University of Houston)

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Abstract

We examine the empirical role of different explanations for the lack of flows of capital from rich to poor countries - the "Lucas Paradox." The theoretical explanations include differences in fun- damentals across countries and capital market imperfections. We show that during 1970-2000 low institutional quality is the leading explanation. For example, improving Peru's institutional quality to Australia's level, implies a quadrupling of foreign investment. Recent studies em- phasize 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.

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Paper provided by Department of Economics, University of Houston in its series Working Papers with number 2003-01.

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Length: 68 pages
Date of creation: Dec 2003
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Handle: RePEc:hou:wpaper:2003-01

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Postal: Houston TX 77023
Web page: http://www.uh.edu/academics/sos/econ/
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Related research
Keywords: capital inflows; fundamentals; institutions; international capital market imperfections; neoclassical model;

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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
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
O1 - Economic Development, Technological Change, and Growth - - Economic Development

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