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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

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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Cited by:
  1. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 1065-1188, November.
  2. Hisham Foad, 2012. "FDI and immigration: a regional analysis," The Annals of Regional Science, Springer, Springer, vol. 49(1), pages 237-259, August.
  3. Francisco Gallego, 2008. "Historical Origins of Schooling: The Role of Democracy and Political Decentralization," Working Papers ClioLab, EH Clio Lab. Instituto de Economía. Pontificia Universidad Católica de Chile 7, EH Clio Lab. Instituto de Economía. Pontificia Universidad Católica de Chile.
  4. Michael Bordo & Harold James, 2006. "One World Money, Then and Now," NBER Working Papers 12189, National Bureau of Economic Research, Inc.
  5. Rahman, Ahmed S., 2010. "Fighting the forces of gravity - Seapower and maritime trade between the 18th and 20th centuries," Explorations in Economic History, Elsevier, Elsevier, vol. 47(1), pages 28-48, January.
  6. Sophia Lazaretou, 2004. "The Drachma, Foreign Creditors and the International Monetary System: Tales of a Currency during the 19th and the Early 20th Century," Working Papers, Bank of Greece 16, Bank of Greece.
  7. Antoine Parent & Christophe Rault, 2005. "The Influences Affecting French Assets Abroad Prior 1914," Documents de recherche, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne 05-14, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
  8. Vadym Volosovych, 2011. "Measuring Financial Market Integration over the Long Run: Is there a U-Shape?," Tinbergen Institute Discussion Papers 11-018/2, Tinbergen Institute.
  9. Peter H. Lindert & Jeffrey G. Williamson, 2001. "Does Globalization Make the World More Unequal?," NBER Working Papers 8228, National Bureau of Economic Research, Inc.
  10. 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.
  11. Aleksandar Zaklan & Paolo Mauro & Martín Minnoni & André Faria, 2006. "The External Financing of Emerging Market Countries," IMF Working Papers 06/205, International Monetary Fund.
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