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Bad Investments and Missed Opportunities? Postwar Capital Flows to Asia and Latin America

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  • Lee E. Ohanian
  • Paulina Restrepo-Echavarria
  • Mark L. J. Wright

Abstract

After World War II, international capital flowed into slow-growing Latin America rather than fast-growing Asia. This is surprising as, everything else equal, fast growth should imply high capital returns. This paper develops a capital flow accounting framework to quantify the role of different factor market distortions in producing these patterns. Surprisingly, we find that distortions in labor markets, rather than domestic or international capital markets, account for the bulk of these flows. Labor market distortions that indirectly depress investment incentives by lowering equilibrium labor supply explain two-thirds of observed flows, while improvement in these distortions over time accounts for much of Asia's rapid growth.

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  • Lee E. Ohanian & Paulina Restrepo-Echavarria & Mark L. J. Wright, 2018. "Bad Investments and Missed Opportunities? Postwar Capital Flows to Asia and Latin America," American Economic Review, American Economic Association, vol. 108(12), pages 3541-3582, December.
  • Handle: RePEc:aea:aecrev:v:108:y:2018:i:12:p:3541-82
    Note: DOI: 10.1257/aer.20151510
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    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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