Lucas (1990) argued that it was a paradox that more capital does not flow from rich countries to poor countries. He rejected the standard explanation of expropriation risk and argued that paucity of capital flows to poor countries must instead be rooted in externalities in human capital formation favoring further investment in already capital rich countries. In this paper, we review the various explanations offered for this paradox.' There is no doubt that there are many reasons why capital does not flow from rich to poor nations yet the evidence we present suggests some explanations are more relevant than others. In particular, as long as the odds of non repayment are as high as 65 percent for some low income countries, credit risk seems like a far more compelling reason for the paucity of rich-poor capital flows. The true paradox may not be that too little capital flows from the wealthy to the poor nations, but that too much capital (especially debt) is channeled to debt intolerant' serial defaulters.
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Length: Date of creation: Feb 2004 Date of revision: Handle: RePEc:nbr:nberwo:10296
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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 F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
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Reinhart, Carmen & Rogoff, Kenneth & Savastano, Miguel, 2003.
"Debt intolerance,"
MPRA Paper
13932, University Library of Munich, Germany.
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Other versions:
Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003.
"Debt Intolerance,"
NBER Working Papers
9908, National Bureau of Economic Research, Inc.
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Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003.
"Debt Intolerance,"
Brookings Papers on Economic Activity,
Economic Studies Program, The Brookings Institution, vol. 34(2003-1), pages 1-74.
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