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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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