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Where did British Foreign Capital Go? Fundamentals, Failures and the Lucas Paradox: 1870-1913

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Michael A. Clemens
Jeffrey G. Williamson

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Abstract

A decade has passed since Robert Lucas asked why capital does not flow from rich to poor countries. Lucas used a contemporary example to illustrate his Paradox, the very modest flow of capital from the United States to India during the second great global capital market boom, after 1970. Had he paid more attention to the first great global capital market boom, after 1870, he might have been less surprised. Very little of British capital exports went to poor, labor-abundant countries. Indeed, about two-thirds of it went to the labor-scarce New World where only a tenth of the world's population lived, and only about a quarter of it went to labor-abundant Asia and Africa where almost two-thirds of the world's population lived. Why? Was it caused by some international market failure, or was it due to some shortfall in underlying economic, demographic or geographic fundamentals that made capital's productivity low in poor countries? This paper constructs a panel data set for 34 countries who as a group got 92 percent of British capital, and uses it to conclude that international capital market failure (including whether the country was on or off the Gold Standard) was not involved. It then ranks the three big fundamentals that mattered schooling, natural resources and demography.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8028.

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Date of creation: Dec 2000
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Handle: RePEc:nbr:nberwo:8028

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F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative

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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. Peter H. Lindert & Jeffrey G. Williamson, 2003. "Does Globalization Make the World More Unequal?," NBER Chapters, in: Globalization in Historical Perspective, pages 227-276 National Bureau of Economic Research, Inc. [Downloadable!]
    Other versions:
  2. Michael Bordo & Harold James, 2006. "One World Money, Then and Now," NBER Working Papers 12189, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Peter H. Lindert & Jeffrey G. Williamson, 2002. "Mondialisation et inégalité : une longue histoire," Revue d’économie du développement, De Boeck Université, vol. 16(1), pages 7-41. [Downloadable!]
  4. Niall Ferguson & Moritz Schularick, 2004. "The Empire Effect: The Determinants of Country Risk in the First Age of Globalization, 1880-1913," Working Papers 04-03, New York University, Leonard N. Stern School of Business, Department of Economics. [Downloadable!]
    Other versions:
  5. André Faria & Martín Minnoni & Aleksandar Zaklan & Paolo Mauro, 2006. "The External Financing of Emerging Market Countries: Evidence from Two Waves of Financial Globalization," IMF Working Papers 06/205, International Monetary Fund. [Downloadable!]
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