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Capital Flows to Developing Countries: The Allocation Puzzle

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Author Info
Pierre-Olivier Gourinchas
Olivier Jeanne

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Abstract

According to the consensus view in growth and development economics, cross country differences in per-capita income largely reflect differences in countries' total factor productivity. We argue that this view has powerful implications for patterns of capital flows: everything else equal, countries with faster productivity growth should invest more, and attract more foreign capital. We then show that the pattern of net capital flows across developing countries is not consistent with this prediction. If anything, capital seems to flow more to countries that invest and grow less. We argue that this result -- which we call the allocation puzzle -- constitutes an important challenge for economic research, and discuss some possible research avenues to solve the puzzle.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13602.

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Date of creation: Nov 2007
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Handle: RePEc:nbr:nberwo:13602

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Find related papers by JEL classification:
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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  1. Pierre-Olivier Gourinchas & Olivier Jeanne, 2006. "The Elusive Gains from International Financial Integration," Review of Economic Studies, Blackwell Publishing, vol. 73(3), pages 715-741, 07. [Downloadable!] (restricted)
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  2. Chang-Tai Hsieh & Peter J. Klenow, 2007. "Relative Prices and Relative Prosperity," American Economic Review, American Economic Association, vol. 97(3), pages 562-585, June.
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  3. repec:rus:hseeco:317881 is not listed on IDEAS
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  9. Easterly, William & Kremer, Michael & Pritchett, Lant & Summers, Lawrence H., 1993. "Good policy or good luck?: Country growth performance and temporary shocks," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 459-483, December. [Downloadable!] (restricted)
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  12. Enrique G. Mendoza & Vincenzo Quadrini & Jose-Victor Rios-Rull, 2007. "Financial Integration, Financial Deepness and Global Imbalances," NBER Working Papers 12909, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Kiminori Matsuyama, 2004. "Financial Market Globalization, Symmetry-Breaking, and Endogenous Inequality of Nations," Econometrica, Econometric Society, vol. 72(3), pages 853-884, 05. [Downloadable!] (restricted)
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  14. Joshua Aizenman & Brian Pinto & Artur Radziwill, 2004. "Sources for Financing Domestic Capital is Foreign Saving a Viable Option for Developing Countries?," Santa Cruz Department of Economics, Working Paper Series 1007, Department of Economics, UC Santa Cruz. [Downloadable!]
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  21. Philippe Aghion & Diego Comin & Peter Howitt, 2006. "When Does Domestic Saving Matter for Economic Growth?," NBER Working Papers 12275, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  22. Sirsha Chatterjee & Kanda Naknoi, 2007. "The Marginal Product of Capital, Capital Flows and Convergence," Purdue University Economics Working Papers 1202, Purdue University, Department of Economics. [Downloadable!]
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  24. Lucas, Robert E, Jr, 1990. "Why Doesn't Capital Flow from Rich to Poor Countries?," American Economic Review, American Economic Association, vol. 80(2), pages 92-96, May. [Downloadable!] (restricted)
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  26. Olivier Jeanne, 2007. "International Reserves in Emerging Market Countries: Too Much of a Good Thing?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 38(2007-1), pages 1-80. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Herrmann, Sabine & Winkler, Adalbert, 2008. "Financial markets and the current account – emerging Europe versus emerging Asia," Discussion Paper Series 1: Economic Studies 2008,05, Deutsche Bundesbank, Research Centre. [Downloadable!]
  2. Susan M. Collins, 2006. "Patterns of international capital flows and their implications for economic development : commentary," Proceedings, Federal Reserve Bank of Kansas City, pages 159-167. [Downloadable!]
  3. Kose, M. Ayhan & Otrok, Christopher & Prasad, Eswar, 2008. "Global Business Cycles: Convergence or Decoupling?," IZA Discussion Papers 3442, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  4. Eswar Prasad & Raghuram G. Rajan & Arvind Subramanian, 2006. "Patterns of international capital flows and their implications for economic development," Proceedings, Federal Reserve Bank of Kansas City, pages 119-158. [Downloadable!]
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